[Senate Hearing 110-1218]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 110-1218

    IMPROVING CONSUMER PROTECTION IN THE PREPAID CALLING CARD MARKET

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 10, 2008

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]










                  U.S. GOVERNMENT PRINTING OFFICE

80-091 PDF                WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001











       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         KAY BAILEY HUTCHISON, Texas, 
    Virginia                             Ranking
JOHN F. KERRY, Massachusetts         TED STEVENS, Alaska
BYRON L. DORGAN, North Dakota        JOHN McCAIN, Arizona
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota             ROGER F. WICKER, Mississippi
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel














                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 10, 2008...............................     1
Statement of Senator Hutchison...................................     1
Statement of Senator Nelson......................................     1
Statement of Senator Pryor.......................................    46
Statement of Senator Thune.......................................    48

                               Witnesses

Acampora, Hon. Patricia L., Commissioner, Public Service 
  Commission, State of New York; Member, Committee on Consumer 
  Affairs, National Association of Regulatory Utility 
  Commissioners..................................................    35
    Prepared statement...........................................    36
Engel, Hon. Eliot L., U.S. Representative from New York..........     6
    Prepared statement...........................................     8
Greenberg, Sally, Executive Director, National Consumers League..    21
    Prepared statement...........................................    22
Kovacic, Hon. William E., Chairman, Federal Trade Commission.....    15
    Prepared statement...........................................     9
O'Brien, Rosemary G., President, Military Marketing LLC..........    33
    Prepared statement...........................................    33
West, Gus K., President and Chairman of the Board, The Hispanic 
  Institute......................................................    27
    Prepared statement...........................................    28

                                Appendix

Submission of Mark E. Budnitz, J.D., Professor of Law, Georgia 
  State University, Martina Rojo and Julia Marblue, entitled, 
  ``Deceptive Claims for Prepaid Telephone Cards and the Need for 
  Regulation,'' Loyola Consumer Law Review, 2006.................    55

 
    IMPROVING CONSUMER PROTECTION IN THE PREPAID CALLING CARD MARKET

                              ----------                              


                     WEDNESDAY, SEPTEMBER 10, 2008

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SR-253, Russell Senate Office Building, Hon. Bill Nelson, 
presiding.

            OPENING STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Good morning. The meeting will come to 
order.
    And as a nod to our distinguished Senator from Texas who 
has another important appointment, I want to yield to her to 
please make an opening statement.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Mr. Chairman, thank you so much.
    I really appreciate your letting me go first, and I just 
want to make a brief statement.
    First of all, I will cosponsor your bill. I think it is 
very important that we have the ability to establish a standard 
and it is kind of a clear, easy bar to clear that whatever is 
on a card should be on a card. And we have had trouble in my 
home State of Texas and the Attorney General has even filed a 
lawsuit against a company that was found not to have produced 
the correct number of minutes for what was promised. And I 
think it particularly preys on people who perhaps do not speak 
English or elderly people, people who use these cards in good 
faith.
    So I think we need to take action, and I really appreciate 
the leadership that you are showing. And I will look forward to 
reading the testimony from the Chairman and look forward to 
working through this so that there is a standard that Americans 
or anyone buying a card can rely on.
    Thank you very much. And thank you, Mr. Chairman.
    Senator Nelson. And I want to thank the Senator from Texas 
for her leadership also with regard to our Space Subcommittee. 
We have a real challenge, as she well knows, in trying to get 
little old NASA back on track. And now with insurgent and 
resurgent Russia, how can we continue to rely on the Russians 
to get to the International Space Station, which is a national 
laboratory thanks to the Senator from Texas, for a 5- or 6- or 
7-year period?
    And this is one of the most mismanaged programs that we 
have ever seen. It has put us in this terrible circumstance of 
having built and paid $100 billion for a national lab that is 
an International Space Station, and come 2011, we may not even 
be able to get to it. The Russians would have total control of 
it, and who knows, they might decide to form a joint 
partnership with the Chinese and take advantage of our $100 
billion.
    Senator Hutchison. Mr. Chairman, I think we need to take a 
very strong action because the possibilities I think have been 
clarified even in the last 2 months that Russia may not be a 
reliable partner for us to use. And I think we should step up 
the efforts to get the Crew Return Vehicle moved up. And then I 
think we need to extend our shuttle missions to finish out the 
Space Station so that it can do the most good for us in energy 
research, as well as the other research that's being done 
there. I think that it will take a very bold action, and I 
think we should start that effort right now.
    Senator Nelson. Well, I am going to need the Senator from 
Texas' help because we want to put all of this in the NASA 
reauthorization bill, but we are having difficulty with a 
certain Senator from South Carolina. And I need the Senator's 
help.
    Senator Hutchison. I was not aware that we had a problem in 
South Carolina, but I am certainly willing to discuss that.
    So that this wonderful conversation we are having is 
relevant, we all want to have calling cards that can take us to 
Mars.
    [Laughter.]
    Senator Nelson. And I thank the Senator.
    Well, let us come back down to Earth. We have got all kinds 
of skullduggery going on here that we need to attack. It has to 
do with prepaid calling cards which are used by millions of 
folks and they buy these cards to stay in touch with their 
loved ones. It is a simple, little card. They buy these and 
they can call their loved ones around the country, around the 
world. It is particularly helpful to military members, seniors, 
immigrants, and low income Americans. With limited financial 
resources, these things become a lifeline to their family and 
their friends.
    But what we have seen is a number of unscrupulous providers 
that are now operating in the market. And basically what it is 
is deception.
    Now, most of the calling cards are from large, well-known 
companies offering these prepaid cards at good rates and 
conditions that are fair and reasonable. That is most of it. 
But as is the case in many things, we have people that are 
taking advantage of the system, and so that is now spilling 
over into the good companies that are fair and reasonable and 
their reputation is on the line.
    Unlike a legitimate prepaid calling card, the fly-by-night 
operators increasingly are not interested in the welfare of the 
Americans buying the calling cards trying to connect with their 
loved ones. Instead, what they are doing is scamming consumers. 
And what they end up doing is imposing junk fees, exorbitant 
rates, selling cards that expire shortly and, in some cases, 
start expiring right when the consumer starts using the card.
    Now, I want to give you two examples. Here is one. It is 
two bucks. It is marketed to people as if you can use this for 
$2 worth of calling. But you see that little red circle up 
there? That is what is on this card. Now, I could get a 
magnifying glass and I might be able to read this. I can tell 
you with my eyes, even with my magnifiers, it is hard for me to 
read this.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Nelson. And would you flip it over to the next 
chart? Let us give you an example of some of the things that 
are in that small type. Now, this is blown up and bolded and 
underlined so that you all can see it. This, obviously, is not 
in that small little writing there. ``Rates and fees vary and 
are subject to change without prior notice. Advertised minutes 
and rates are based on a single, non-pay phone call from the 
contiguous United States.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Congressman, just have a seat there at the table and we 
will get to you in a second.
    ``Succeeding calls are billed at a higher rate. Calls are 
billed in 3-minute increments.'' So if the calling person calls 
and they get an answering machine and they take all of 30 
seconds, it is still billed at 3 minutes. ``A post-call service 
fee of 40 percent and a hang-up fee of 99 cents apply per 
call.'' Now, that's just that one.
    Flip it over to the next one. Is this on the same card? 
This is on the Africa Card or the Go Card? This is on this one. 
This is the Go Card.
    ``A semi-monthly charge of up to 89 cents applies to 24 
hours of first use. Card expires 180 days after the date of 
first use. Standard off-peak hours are from 2 a.m. to 4 a.m.--
--


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    [Laughter.]
    Senator Nelson.--``weekdays, excluding holidays.''
    Can you flip it to the next one?
    Now, this is a card that is aimed at immigrants so that 
they can call their loved ones in Africa. Look down at the 
bottom. Can you lift it up there? Down at the bottom, it is so 
small on this blowup I cannot read it, much less can I read it 
on that. And that's the card.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Nelson. And what that says is: ``Call time is 
deducted in 1- to 3-minute increments. Service fees of up to 25 
percent apply. A disconnect fee up to 98 cents may apply. A 
weekly maintenance fee of 69 cents may apply.'' This is for a 
$5 card. ``Card expires 3 months from first use or 2 years from 
purchase.''


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Nelson. You got any more up there?
    OK. You see the problem.
    So I hope we can hear some testimony on this subject and 
try to expose it. You might think that the language might tell 
you how much it costs to make a domestic or international call, 
but it does not. And instead, we have a bunch of statements 
telling you how the card will not work and listing numerous 
add-on fees and caveats, all of which we have just gone over 
and which you cannot read on the card. If you can read the 
King's English, you better have a microscope. Otherwise, you 
are not going to be able to understand what you have just 
bought for $2 or $5.
    So the bottom line is if you use that card twice, you lose 
it. You lose the value of the card. And you may lose it just by 
using it once with all those add-ons.
    So with that as an intro, I want to call on the Honorable 
Eliot Engel, Congressman from New York, who wants to make a 
statement. And Congressman, we understand that--was it Delta or 
the US Air Shuttle that was late?
    Representative Engel. It was Delta.
    Senator Nelson. OK. Duly noted in the record.
    Representative Engel. The truth is US Air probably would 
have been even later, but that is OK.
    [Laughter.]
    Senator Nelson. Give us a quick statement. We have pretty 
well laid it out. Senator Hutchison was here and I have laid it 
out. We want your endorsement and your observation on this.

               STATEMENT OF HON. ELIOT L. ENGEL, 
               U.S. REPRESENTATIVE FROM NEW YORK

    Representative Engel. Well, thank you, Senator.
    As you have been stating, legislation of this kind should 
be a no-brainer. I mean, it is just crying out for attention, 
and it is something that everybody can agree on.
    And I want to thank you and the Ranking Member Hutchison 
for holding today's hearing and for the invitation to speak. I 
know, Senator, you have done lots of work on this issue.
    I must comment that you have certainly come a long ways 
since we were House colleagues together, and I am always happy 
to see my good friends in the House move on to the Senate and 
do really great work. And that is especially true of the work 
that you have done. I am always pleased to have your 
cooperation and your friendship.
    I am here to discuss my legislation, the Calling Card 
Consumer Protection Act, and the reasons that I introduced this 
bill. I think that you have made it very clear as to why we 
have introduced bills like this and why it is needed.
    Obviously, calling cards are an invaluable resource for 
people who do not have long distance telephone service in their 
home or those who make frequent overseas calls. Common users of 
these cards are students, members of the armed forces, and 
those whose family lives outside of the country. They are also 
popular among people who either choose not to subscribe to long 
distance telephone service or who simply cannot afford it. They 
are a necessary tool for keeping in touch with friends or 
family members. Calling cards that provide the services that 
the companies advertise can save consumers a great deal of 
money when they call home. But, unfortunately, as you have 
pointed out, Senator, and we are seeing over and over again, 
many companies fail to keep their advertised terms or hide 
them.
    About 2 years ago, I started hearing from a number of 
constituents regarding their prepaid calling cards. They were 
contacting me because their calling cards were not providing 
the number of minutes that were advertised. In fact, many were 
not even close to delivering the promised number of minutes. 
Furthermore, when my constituents attempted to contact the 
calling card company, they found it difficult or impossible to 
reach a customer service line.
    I investigated this myself by purchasing a calling card. I 
found the same problem that my constituents were having. This 
is when I decided to introduce my legislation with Congressman 
Mike Ferguson of New Jersey to ban these practices.
    In independent tests, as well as those conducted by States 
Attorneys General--and I know Florida has done a lot in this 
regard--calling cards were shown to provide far fewer minutes 
than they advertised. One study by The Hispanic Institute found 
that on average the caller only received about 60 percent of 
the minutes guaranteed by the card. In a $4 billion a year 
industry, obviously this deception is costing consumers and 
honest companies hundreds of millions of dollars every year, 
and of course, these companies prey on minority communities, 
communities that do not speak English well. This is especially 
prevalent in those communities.
    Companies have also instituted a variety of hidden fees. 
For example, some cards deduct minutes even if the call is not 
connected or if you get a busy signal. Other cards cut off the 
call after a few minutes so the consumer must redial and again 
be subjected to the connection charge. And the connection 
charge is obviously on top of the regular charge, and so people 
find that it might take 5 minutes or 10 minutes away just for a 
connection. Some cards round up the number of minutes used in 
4-minute increments. Others advertise no connection fees in big 
letters on a sign, but instead charge you a hang-up fee. These 
fees take considerable money out of consumers' pockets every 
time they pick up the phone.
    Obviously, calling card fraud harms segments of the 
population who are among the most vulnerable to being 
victimized by unscrupulous companies only seeking to make a 
quick profit. These unscrupulous companies are known to target 
poor, minority, and immigrant populations, and they do not stop 
there. Even our soldiers in Iraq have been preyed upon by 
deceptive practices of calling card companies.
    In a recent article in BusinessWeek magazine, the author 
detailed one example of a company that marketed towards 
Spanish-speaking consumers, but the fine print that detailed 
all the various fees they would charge the user was in English. 
The company's answer to this? We are in America, they said. 
They had the temerity to claim that even when they put Spanish 
language advertisements in markets with Spanish-speaking 
consumers, they can hide all their fees in English.
    My legislation, like yours, Senator Nelson, would put a 
stop to a number of deceptive practices employed by these 
companies. It would require an advertisement or packaging to 
include clear disclosure of all terms, conditions, and fees in 
the language in which the calling card is advertised. In 
addition, it would ensure that the Federal Trade Commission has 
the jurisdiction to pursue enforcement of these rules against 
companies who are not abiding by them.
    Calling cards can be extremely useful for consumers, and I 
do not want to see honest companies punished and there are, 
obviously, a lot of honest companies. But the honest companies 
are also being harmed by these dishonest companies. There is a 
large enough market for a company to live up to its promises 
and to turn an honest profit. If consumers know that the card 
they purchase will provide the full amount of calling time that 
is advertised, this will benefit both consumers and the 
marketplace.
    So I, in conclusion, would strongly encourage the Members 
of this Committee to support S. 2998, Senator Nelson's 
legislation to protect consumers from calling card fraud. With 
only a few weeks remaining in the 110th Congress, our 
constituents should not have to wait for Congress to reconvene 
in 2009 for action on this important legislation.
    Once again, Senator, thank you for holding this hearing 
today and allowing me to testify.
    [The prepared statement of Representative Engel follows:]

              Prepared Statement of Hon. Eliot L. Engel, 
                   U.S. Representative from New York
    Chairman Inouye, Ranking Member Hutchison:

    I want to thank you for holding today's hearing and for the 
invitation to speak on this important topic. I especially want to thank 
Senator Bill Nelson for his work on this issue. I have collaborated 
with Senator Nelson in the past, and I am always pleased to have his 
cooperation and his friendship.
    I am here to discuss my legislation, the Calling Card Consumer 
Protection Act, and the reasons that I introduced the bill.
    Calling cards are an invaluable resource for people who don't have 
long distance telephone service in their home or those who make 
frequent overseas calls. Common users are students, members of the 
Armed Forces, and those whose family lives outside of the country. They 
are also popular among people who either choose not to subscribe to 
long distance telephone service, or who cannot afford it. They are a 
necessary tool for keeping in touch with friends or family members. 
Calling cards that provide the services that the companies advertise 
can save consumers a great deal of money when they call home.
    Unfortunately, as we are seeing over and over again, many companies 
fail to keep their advertised terms.
    About 2 years ago, I began hearing from a number of constituents 
regarding their prepaid calling cards. They were contacting me because 
their calling cards failed to provide the number of minutes that were 
advertised. In fact, many were not even close to delivering the 
promised number of minutes. Furthermore, when my constituents attempted 
to contact the calling card company, they found it difficult or 
impossible to reach a customer service line.
    I investigated this myself by purchasing a calling card. I found 
the same problems that my constituents were having. This is when I 
decided to introduce my legislation, with Congressman Mike Ferguson, to 
ban these practices.
    In independent tests, as well as those conducted by states' 
Attorneys General, calling cards were shown to provide far fewer 
minutes than were advertised. One study by The Hispanic Institute found 
that on average, the caller only received an average of 60 percent of 
the minutes guaranteed by the card. In a $4 billion a year industry, 
this deception is costing consumers and honest companies hundreds of 
millions of dollars every year.
    Companies have also instituted a variety of hidden fees. For 
example, some cards deduct minutes even if the call is not connected. 
Other cards cut off the call after a few minutes so the consumer must 
redial and again be subjected to the connection charge. Some cards 
round up the number of minutes used in 4 minute increments. Others 
advertise ``no connection fees,'' in big letters on a sign, but instead 
charge you a hang-up fee. These fees take considerable money out of 
consumers' pockets every time they pick up the phone.
    Calling card fraud harms segments of the population who are among 
the most vulnerable to being victimized by unscrupulous companies only 
seeking to make a quick profit. These unscrupulous companies are known 
to target poor, minority, and immigrant populations. And they don't 
stop there. Even our soldiers in Iraq have been preyed upon by 
deceptive practices of calling card companies.
    In a recent article in BusinessWeek magazine, the author detailed 
one example of a company that marketed toward Spanish-speaking 
consumers. But the fine print that detailed all the various fees they 
would charge the user was in English. The company's answer to this? 
``We're in America,'' they said. They had the temerity to claim that 
even when they put Spanish language advertisements in markets with 
Spanish-speaking consumers, they can hide all their fees in English.
    My legislation, like Senator Nelson's, would put a stop to a number 
of deceptive practices employed by these companies. It would require an 
advertisement or packaging to include clear disclosure of all terms, 
conditions, and fees in the language in which the calling card is 
advertised. In addition, it would ensure that the Federal Trade 
Commission has the jurisdiction to pursue enforcement of these rules 
against companies who are not abiding by them.
    Calling cards are a useful product for consumers, and I do not want 
to see honest companies punished. There is absolutely no reason why a 
company can't deliver what is promised, and still turn an honest 
profit. If consumers know that the card they purchase will provide the 
full amount of calling time that is advertised, this will benefit both 
consumers and the marketplace.
    I would strongly encourage the Members of this Committee to support 
S. 2998, Senator Nelson's legislation to protect consumers from calling 
card fraud. With only a few weeks remaining in the 110th Congress, our 
constituents shouldn't have to wait for Congress to reconvene in 2009 
for action on this important legislation.
    Once again, thank you for holding this hearing today, and allowing 
me to testify.

    Senator Nelson. Thank you, Congressman. Thank you.
    You are welcome to stay. You can leave--whatever is your 
pleasure. We are very grateful to you for having come over here 
and also for having introduced this legislation in the House.
    Representative Engel. Thank you very much.
    Senator Nelson. So thank you and good luck to you in the 
House.
    We are pleased to have William Kovacic, the Chairman of the 
Federal Trade Commission. What I am going to do to truncate 
this hearing is we are going to take your written testimony and 
enter it into the record.
    [The prepared statement of Mr. Kovacic follows:]

       Prepared Statement of Hon. William E. Kovacic, Chairman, 
                        Federal Trade Commission
I. Introduction
    Chairman Inouye, Ranking Member Hutchison, Members of the Committee 
on Commerce, Science, and Transportation, I am William Kovacic, 
Chairman of the Federal Trade Commission (``Commission'' or 
``FTC'').\1\ Thank you for giving the Commission this opportunity to 
testify before the Committee about consumer protection issues 
associated with the sale of prepaid calling cards.
---------------------------------------------------------------------------
    \1\ The written statement presents the views of the Federal Trade 
Commission. Oral statements and responses to questions reflect the 
views of the speaker and do not necessarily reflect the views of the 
Commission or any other Commissioner.
---------------------------------------------------------------------------
    The Commission appreciates the Committee's decision to hold a 
hearing to shed light on deceptive practices in the calling card 
industry. Over the last decade, the prepaid calling card industry has 
grown into a multi-billion dollar a year industry. Prepaid calling 
cards can provide consumers with a convenient and inexpensive way to 
call friends and family at home and abroad. Unfortunately, however, 
purchasers of prepaid calling cards often do not receive the number of 
calling minutes advertised for the cards they purchase and are charged 
undisclosed or inadequately-disclosed fees and surcharges that reduce 
the value of the prepaid calling cards they purchased.
    As the Nation's consumer protection agency, the FTC is committed to 
protecting consumers from deceptive marketing of prepaid calling cards. 
The FTC recently brought two cases alleging that distributors of 
prepaid calling cards had been deceptively marketing such cards. The 
Commission also has other active prepaid calling card investigations.
    This statement provides the Committee with background information 
about the prepaid calling card industry and describes the FTC's recent 
law enforcement actions against distributors of prepaid calling cards. 
It also discusses the FTC's consumer education and outreach efforts. 
Additionally, it offers comments on S. 2998, the ``Prepaid Calling Card 
Consumer Protection Act of 2008,'' introduced by Senators Bill Nelson, 
Olympia Snowe, John Kerry, and Mel Martinez. Finally, the Commission 
reiterates its support for the provision of the FTC reauthorization 
bill that would amend the FTC Act to repeal the exemption for common 
carriers subject to the Communications Act. Repealing the exemption for 
telecommunications carriers would ensure that the Commission can bring 
law enforcement actions against all participants in the prepaid calling 
card industry that are engaging in deceptive and unfair practices, 
including those companies that provide the underlying 
telecommunications services for these cards.
II. Background
    Calling card providers market their cards for a variety of uses. 
Some cards are marketed primarily for use by consumers making calls 
within the United States. Such cards usually offer consumers the 
ability to make domestic long distance calls for pennies per minute. 
Other cards are marketed to U.S. consumers who want to call the United 
States when they are traveling or working in other countries. Indeed, 
many such cards are marketed to members of the United States armed 
forces serving around the world. In addition, a substantial number of 
prepaid calling cards are sold to recent immigrants to the United 
States who depend on calling cards to stay in touch with family and 
friends abroad.\2\ Such calling cards, which typically retail for 
between $2 to $10 each, are generally sold in small retail outlets, 
including grocery and convenience stores, gasoline stations, and 
newsstands.
---------------------------------------------------------------------------
    \2\ See Susan Sachs, Immigrants See Path to Riches in Phone Cards, 
N.Y. Times, Aug. 11, 2002, available at http://query.nytimes.com/gst/
fullpage.html?res=9800E7D6123AF932A2575BC0A9
649C8B63&sec=&spon=&pagewanted=2; Talk Isn't So Cheap on a Phone Card, 
Business Week, July 23, 2007, available at http://www.businessweek.com/
magazine/content/07_30/b4043
079.htm; Mark E. Budnitz, Martina Rojo and Julia Marlowe, Deceptive 
Claims for Prepaid Telephone Cards and the Need for Regulation, 19 
Loyola Consumer L. Rev. 1 (2006).
---------------------------------------------------------------------------
    To advertise prepaid calling cards directed to consumers making 
international calls from the U.S., companies distribute eye-catching 
posters that are displayed on the walls and windows of the stores where 
such cards are sold. One hallmark of such posters is bold claims, made 
in large, colorful type, about the number of calling minutes the 
advertised cards provide for calls to particular countries. In stark 
contrast to the claims about available calling minutes that dominate 
the posters, the bottom of the posters generally contains small print 
disclaimers about a wide variety of fees and surcharges that reduce the 
value of the cards. The disclaimers are frequently in type so small as 
to be nearly illegible and in language so vague as to be effectively 
incomprehensible.\3\
---------------------------------------------------------------------------
    \3\ For example, in FTC v. Alternatel, Inc., G.F.G. Enterprises 
LLC, also d/b/a Mystic Prepaid, Voice Prepaid, Inc., Voice 
Distributors, Inc., Telecom Express, Inc., Lucas Friedlaender, Moses 
Greenfield, Nickolas Gulakos, and Frank Wendorff, 08-21433-CIV-Jordan/
McAliley (S.D. Fla.), the FTC has alleged in its complaint that: ``in 
numerous instances defendants' posters contain vague disclosures about 
fees in tiny font on the bottom of the poster, stating in relevant 
part:

    by using this card you agree to the following: Prompted minutes are 
before applicable charges and fees, application of surcharges and fees 
have an effect of reducing total minutes on cards. One or all of the 
following may apply: (1) A weekly maintenance fee ranging between $.49 
and $.79. (2) A hang-up fee between $.05 and $1 depending upon length 
and destination of the call. (3) A destination surcharge of between 0 
percent and 100 percent.--minutes and/or seconds are rounded to 
multiple minute increments.--International calls made to cellular 
phones are billed at higher rates.--Toll free access numbers are 
subject to an additional fee of up to 4 cents per minute.--Prices are 
subject to change without notice.--This card has no cash value.--Card 
expires 3 months after first use or 12 months after activation.''
---------------------------------------------------------------------------
    Consumers typically use their prepaid calling cards as follows: the 
consumer dials an ``access number'' printed on the back of the card. A 
recorded message then prompts the consumer to enter the card's 
authorization code or Personal Identification Number (``PIN''), which 
is printed on the card. Next, the consumer usually hears an 
announcement of the monetary value of the card. The consumer then 
enters the phone number he or she is trying to reach and hears an 
automated ``voice prompt'' announcing the number of minutes of time 
ostensibly available on the card.
    As discussed in more detail below, the FTC, our state law 
enforcement colleagues, and third parties who have tested a wide 
variety of prepaid calling cards have found that prepaid calling cards 
offered by a number of industry participants routinely fail to deliver 
the minutes promised in their advertising and voice prompts. As alleged 
in two cases recently brought by the FTC, our testing showed that the 
defendants' prepaid calling cards delivered about half the number of 
promised minutes.
III. Law Enforcement Actions
    The FTC works closely with the offices of State Attorneys General 
and other state agencies. In the fall of 2007, the FTC established a 
joint Federal-state task force concerning deceptive marketing practices 
in the prepaid calling card industry. The task force members include 
representatives from the offices of more than 35 State Attorneys 
General and other state and local agencies, and the Federal 
Communications Commission (``FCC''). Working cooperatively allows us to 
share information and facilitate law enforcement activity in the 
prepaid calling card area.\4\
---------------------------------------------------------------------------
    \4\ Representatives from the following Offices of Attorneys General 
are members of the task force: Alabama, Arizona, Arkansas, California, 
Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, 
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Maine, 
Massachusetts, Minnesota, Missouri, Montana, New Mexico, Nevada, New 
Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, 
Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, 
Virginia, Washington, Wisconsin. In addition, the New York State 
Consumer Protection Board and the New York City Department of Consumer 
Affairs have participated in the task force.
---------------------------------------------------------------------------
    Currently, the Commission is litigating two actions in Federal 
district court, alleging that the defendants deceptively marketed their 
prepaid calling cards. In addition, as discussed below, the Attorneys 
General for the states of Florida and Texas recently have taken action 
against prepaid calling card companies for their allegedly deceptive 
practices.
A. FTC Enforcement Actions
    Under Section 5 of the FTC Act, the FTC has authority to bring 
cases against companies and individuals for engaging in deceptive or 
unfair acts or practices in or affecting commerce.\5\ Since the 1990s, 
the FTC has used this power to bring enforcement actions against 
entities for deceptively selling prepaid calling cards. The Commission 
brought its first two prepaid calling card cases against companies that 
the FTC alleged were deceptively marketing prepaid calling cards by, 
among other things, misrepresenting the per-minute rates consumers 
would be charged when using the cards and by failing to clearly and 
conspicuously disclose connection and maintenance fees associated with 
the cards.\6\ Since then, the FTC has brought several cases alleging 
that telemarketers deceptively marketed calling cards to consumers and 
charged consumers without their authorization.\7\
---------------------------------------------------------------------------
    \5\ 15 U.S.C.  45(a)(2).
    \6\ FTC v. PT-1 Comm'cns, Inc., 99-CIV-1432 (S.D.N.Y.) (Stip. Final 
Order filed Feb. 25, 1999) (order requiring monetary relief and barring 
defendants from misrepresenting the value of its prepaid calling cards 
and from failing to clearly and prominently disclose fees and charges); 
FTC v. Trans-Asian Comm'cns, Inc., 97-CIV-5764 (S.D.N.Y.) (Stip. Final 
Order filed Mar. 17, 1998) (order requiring $1 million performance bond 
before defendants can advertise or sell prepaid calling cards and 
barring future material misrepresentations about prepaid calling 
cards).
    \7\ FTC v. 9131-4740 Quebec, Inc., CV-02242 (N.D. Ohio) (Compl. 
filed July 25, 2007) (pending); FTC v. T2U, Inc., 101-CV-811 (N.D. 
Ohio) (Stip. Final Order filed Sept. 13, 2001); FTC v. Enhanced Billing 
Servs., Inc., 101-CV-1060 (D.D.C.) (Stip. Final Order filed Aug. 1, 
2001).
---------------------------------------------------------------------------
    This spring, the FTC filed two cases against major distributors of 
prepaid calling cards. On March 25, 2008, the FTC sued Clifton Telecard 
Alliance, a national distributor of prepaid calling cards based in New 
Jersey, and the company's principal.\8\ The FTC alleged that the 
defendants, which market their cards chiefly to recent immigrants, 
engaged in deceptive marketing practices by: (1) misrepresenting the 
number of calling minutes provided by their cards; (2) failing to 
adequately disclose fees and charges associated with their cards; and 
(3) failing to adequately disclose that the value of their cards may be 
reduced even when a call does not connect. In support of its case, the 
FTC tested 46 of Clifton Telecard Alliance's calling cards purchased at 
various retail outlets.\9\ In the FTC's tests of these cards, none 
delivered the number of calling minutes advertised in posters displayed 
at the point of sale. Three of the 46 cards failed to work at all, and, 
on average, the remaining 43 cards delivered only 43 percent of the 
advertised calling minutes. On April 2, 2008, the Federal district 
court in New Jersey granted the FTC's motion for a temporary 
restraining order.
---------------------------------------------------------------------------
    \8\ FTC v. Clifton Telecard Alliance One LLC, d/b/a Clifton 
Telecard Alliance and CTA, Inc., and Mustafa Qattous, 2:08-cv-01480-
PGS-ES (D.N.J.).
    \9\ The FTC has been able to test prepaid calling cards thanks in 
part to the invaluable assistance of El Salvador's Defensoria del 
Consumidor, Colombia's Superintendencia de Industria y Comercio, the 
Egypt Consumer Protection Authority, Mexico's Procuraduria Federal del 
Consumidor (PROFECO), Panama's Autoridad de Proteccion al Consumidor y 
Defensa de la Competencia, and Peru's Instituto Nacional de Defensa de 
la Competencia y de la Proteccion de la Propiedad Intelectual 
(INDECOPI). In this area, as in so many others, international 
cooperation has proved to be vital to the Commission's law enforcement 
actions.
---------------------------------------------------------------------------
    On May 19, 2008, the FTC filed a similar action, FTC v. Alternatel, 
against several companies alleged to act as a common enterprise in 
distributing prepaid calling cards out of Florida, Massachusetts, and 
New Jersey. In the Alternatel case, the Commission alleged that the 
defendants violated Section 5 of the FTC Act by misrepresenting the 
number of calling minutes their cards provide and failing to adequately 
disclose fees and charges associated with their cards. As in the 
Clifton Telecard Alliance case, the FTC conducted extensive testing of 
the Alternatel defendants' prepaid cards and found that the actual 
number of minutes provided by the cards fell far short of the 
defendants' advertising claims. In tests of 87 of the defendants' 
cards, the cards delivered on average only 50.4 percent of the minutes 
advertised on posters at the point of sale.\10\ On May 23, 2008, the 
Federal district court for the Southern District of Florida entered a 
temporary restraining order in the Alternatel matter.
---------------------------------------------------------------------------
    \10\ The results of the FTC testing of the defendants' cards in the 
Clifton Telecard Alliance and the Alternatel cases are consistent with 
the testing results of The Hispanic Institute, a nonprofit organization 
that has issued a report on its testing of a wide variety of prepaid 
calling cards. The Hispanic Institute reports that, on average, the 
cards it tested delivered only 60 percent of the minutes promised in 
voice prompts. See http://www.thehispanicinstitute.net/research/
callingcard/qa (visited June 18, 2008). They are also consistent with 
testing results that have been offered in private litigation. See IDT 
Telecom, Inc. v. CVT Prepaid Solutions, Inc., et al., Civil Action No. 
07-1076 (D.N.J.) (Pls. Mem. In Supp. of Their Order to Show Cause Why a 
Prelim. Inj. Should Not Issue, at 6-10; Ex. 1 to Suppl. Aff. of Gabi 
Schechter, dated Mar. 26, 2007) (alleging the defendants' calling cards 
delivered on average only 60 percent of prompted minutes); IDT Telecom, 
Inc. v. Voice Distributors, Inc., d/b/a Voice Prepaid, et al., Civil 
Action No. 07-2465 (Mass. Sup. Ct., Middlesex Cty.) (Compl.  16) 
(alleging that the defendants' calling cards delivered on average only 
65 percent of prompted minutes); IDT Telecom, Inc. v. Diamond Phone 
Card, Inc., et al., Index No. 3682-08 (N.Y. Sup. Ct., Kings Cty.) 
(Compl.  15) (alleging that the defendants' calling cards delivered on 
average only 59 percent of prompted minutes).
---------------------------------------------------------------------------
    In both the Clifton and Alternatel actions, the defendants have 
moved to dismiss the FTC's case on the grounds that the underlying 
telecommunications carriers are necessary parties that the FTC cannot 
join because of the exemption in the FTC Act for common carriers 
subject to the Communications Act. The FTC has opposed defendants' 
motions, and is confident that it will win on the merits. As final 
relief in both cases, the FTC seeks a permanent injunction and consumer 
redress and/or disgorgement of ill-gotten gains.
B. State Law Enforcement Actions
    Two states recently brought law enforcement actions against a 
number of prepaid calling card companies. Over the last few months, the 
Florida Attorney General has announced that he has entered into 
Assurances of Voluntary Compliance (``AVC'') with eleven prepaid 
calling card companies doing business in Florida.\11\ These settlements 
are the culmination of a broad investigation into the prepaid calling 
card industry launched by the Florida Attorney General in July of 2007. 
Notably, while the FTC has brought its lawsuits solely against 
distributors of prepaid calling cards, the Florida Attorney General 
entered into AVCs with eleven companies that include both distributors 
and telecommunications service providers for prepaid calling cards.
---------------------------------------------------------------------------
    \11\ See McCollum Announces Prepaid Calling Card Settlements, 
Industry-Wide Reform (June 11, 2008) available at http://
myfloridalegal.com/newsrel.nsf/newsreleases/79C6666DB24608
D785257465004EC901 (visited on August 27, 2008) (announcing settlements 
with IDT America, Inc.; Union Telecom Alliance; Total Call 
International, Inc.; Blackstone Calling Card, Inc.; CVT Prepaid 
Solutions, Inc.; Dollar Phone Enterprise, Inc.; STi Prepaid, LLC; 
Alternatel, Inc; and Cristel Telecommunications, LLC); Prepaid Calling 
Company Reaches Settlement with Attorney General (July 2, 2008) 
available at http://myfloridalegal.com/newsrel.nsf/newsreleases/1439
BD5308D470588525747A006423B8 (visited on August 27, 2008) (announcing a 
settlement with Touch-Tel Partners USA, LLC); Attorney General Reaches 
Settlement with 11th Prepaid Calling Card Company (August 21, 2008) 
available at http://myfloridalegal.com/newsrel.nsf/news
releases/C410C546EB409C93852574AC006C9499 (visited on August 27, 2008) 
(announcing settlement with Cinco Telecom Corp. d/b/a Orbitel).
---------------------------------------------------------------------------
    On May 23, 2008, the Texas Attorney General filed a lawsuit against 
Next-G Communication, Inc., a telecommunications service provider that 
produces, sells and distributes prepaid calling cards.\12\ The Texas 
lawsuit alleges that Next-G Communication has marketed and sold prepaid 
calling cards throughout Texas that fail to deliver the number of 
minutes it advertises to customers and that the defendant has failed to 
disclose fees and charges associated with its calling cards. The Texas 
Attorney General alleges that Next-G's prepaid calling cards 
consistently delivered only 40 percent of the minutes claimed on the 
Next-G's advertising posters and confirmed by Next-G's voice prompt 
given at the beginning of each call.\13\
---------------------------------------------------------------------------
    \12\ State of Texas v. Next-G Commnc'n, Inc., Taj Khwaja, 
2008CI08149 (Bexar County, TX) (Pet. filed May 23, 2008).
    \13\ See Attorney General Abbott Takes Legal Action Against Prepaid 
Calling Card Company (May 23, 2008) available at http://
www.oag.state.tx.us/oagNews/release.php?id=2479 (visited on August 27, 
2008).
---------------------------------------------------------------------------
    The FTC applauds the actions of the Florida and Texas Attorneys 
General and is grateful for the participation of all of our law 
enforcement partners in the joint Federal-State calling card task 
force.
IV. Consumer Education and Media Outreach
    In addition to bringing enforcement cases, the Commission has made 
consumer education and outreach a high priority. The FTC recently 
updated its consumer education brochure on calling cards, which is 
available in both English and Spanish on the Commission's website.\14\ 
The Commission also has done extensive outreach about prepaid calling 
cards to media outlets that cater to non-English and English speaking 
consumers. The FTC wants to make sure consumers know that it is 
unlawful to advertise calling cards that misrepresent the number of 
minutes that the calling cards provide or to fail to clearly and 
conspicuously disclose the fees and charges that reduce the value of 
the calling cards. The FTC also wants consumers to know that they can 
and should complain to the FTC if they do not get what they pay for.
---------------------------------------------------------------------------
    \14\ See Buying Time: The Facts About Pre-Paid Phone Cards (2008) 
available at http://www.ftc.gov/bcp/edu/pubs/consumer/products/
pro04.pdf (visited on August 27, 2008).
---------------------------------------------------------------------------
V. The Proposed Legislation
    As described above, the FTC Act's prohibitions on deceptive and 
unfair practices provide the Commission with a powerful tool to bring 
enforcement actions against the distributors of prepaid calling cards. 
Senate Bill 2998, the proposed ``Prepaid Calling Card Consumer 
Protection Act,'' is directed at the conduct of prepaid calling card 
service providers (carriers) as well as distributors, and therefore 
would implicitly give the FTC jurisdiction over common carriers engaged 
in the deceptive practices prohibited by the proposed legislation. 
Consumers would benefit greatly from legislation giving the FTC 
jurisdiction over such practices by telecommunications carriers. The 
legislation also would authorize the FTC to seek civil penalties for 
violations of the Act or of the rules issued by the FTC pursuant to the 
Act, thus adding an important remedy to those already available to the 
Commission.
    Generally, S. 2998 requires the FTC to promulgate a rule requiring 
that, among other things, prepaid calling card providers and 
distributors provide clear and conspicuous disclosures of the number of 
minutes provided by the calling cards, the amount and frequency of all 
fees assessed for use of the calling cards, and the expiration date of 
the cards. The bill also prohibits prepaid calling card providers and 
distributors from selling or distributing calling cards that do not 
provide the advertised number of calling minutes or from assessing 
inadequately disclosed fees. The bill further provides for the FTC to 
bring suit alleging violations of the Prepaid Calling Card Consumer 
Protection Act as if they were violations of an FTC rule, thus enabling 
the agency to seek civil penalties for violation of the Act and the 
FTC's rule promulgated pursuant to the Act.
    The FTC supports the goals of S. 2998, and appreciates the implied 
extension of jurisdiction--which will ensure a level playing field by 
allowing the Commission to act to hold violators responsible for 
deceptive trade practices whether they are providing the 
telecommunications services or distributing the prepaid calling cards--
and the proposed authority to seek civil penalties. Two aspects of the 
bill raise concerns, however. First, the bill creates a knowledge 
standard for holding prepaid calling card distributors liable if they 
violate the Act by distributing calling cards that provide fewer 
minutes or a higher per minute rate than advertised, or announced on 
the voice prompt given when a consumer places a call.\15\ Incorporating 
a knowledge standard into the law could create an additional--and 
potentially very challenging--evidentiary burden on the FTC when 
seeking injunctive relief in a civil case.\16\ Second, the bill 
explicitly exempts from its coverage prepaid wireless phone services 
where the consumer has established a relationship with the wireless 
carrier by purchasing a wireless service handset package. The 
Commission is concerned that the bill's exception for prepaid services 
based on the purchase of a handset and wireless calling services would 
provide a powerful incentive for the worst actors in the prepaid 
calling card industry to migrate their business practices to prepaid 
wireless handsets and refill cards, and thereby avoid the mandates of 
the proposed law.\17\
---------------------------------------------------------------------------
    \15\ The bill does not have a parallel knowledge requirement for 
prepaid calling card service providers.
    \16\ Indeed, under general consumer protection principles and 
traditional jurisprudence under Section 5 of the FTC Act, 15 U.S.C.  
45, the Commission need not show knowledge or intent in order to stop 
an entity from engaging in unfair or deceptive practices. Notably, 
however, Section 5(m)(1) of the FTC Act includes a knowledge standard 
for instances where the FTC is seeking civil penalties for violations 
of an FTC Rule, as opposed to equitable relief, such as an injunction. 
15 U.S.C.  45(m)(1) (``The Commission may commence a civil action to 
recover a civil penalty in a district court of the United States 
against any person, partnership, or corporation which violates any rule 
under this chapter respecting unfair or deceptive acts or practices . . 
. with actual knowledge or knowledge fairly implied on the basis of 
objective circumstances.''). Eliminating the knowledge threshold from 
the bill would not change the Commission's elevated burden for 
obtaining monetary relief in civil penalty cases.
    \17\ Some participants in the prepaid calling card industry are 
beginning to offer prepaid wireless services. As the cost of providing 
cellular phones and calling minutes continues to decrease, the 
incentive to move consumers to prepaid wireless accounts from more 
traditional prepaid calling cards has increased.
---------------------------------------------------------------------------
    To enable the Commission to address problems with deceptive conduct 
involving prepaid calling cards more effectively, the Committee might 
also consider giving the Commission authority to bring actions seeking 
civil penalties in its own right against prepaid calling card providers 
and distributors rather than through the Department of Justice. Giving 
the FTC authority to bring its own civil penalties cases in this area 
would help ensure that the Commission does not have to forego quick 
relief in order to seek civil penalties.
    The Commission recognizes that the agency and the Committee share 
the same goal: stopping unscrupulous calling card companies from 
defrauding vulnerable consumers. The Commission looks forward to 
working with the Committee regarding the language of the legislation as 
the Committee moves forward.
VI. The Common Carrier Exemption
    On several occasions, the Commission has testified in favor of the 
repeal of the common carrier exemption.\18\ The Commission continues to 
endorse its repeal, and thanks the Committee for its continued support 
for this measure. The FTC Act exempts common carriers subject to the 
Communications Act from its prohibitions on unfair and deceptive acts 
or practices and unfair methods of competition. This exemption 
originated in an era when telecommunications services were provided by 
highly-regulated monopolies. The Commission believes that the exemption 
is now outdated. In the current marketplace, firms are expected to 
compete in providing telecommunications services. Congress and the FCC 
have dismantled much of the economic regulatory apparatus formerly 
applicable to the industry. Removing the exemption from the FTC Act 
would not alter the jurisdiction of the FCC, but would give the FTC the 
authority to protect consumers against unfair and deceptive practices 
by common carriers in the same way that it can protect against unfair 
and deceptive practices by non-common carriers involved in the 
provision of similar services.
---------------------------------------------------------------------------
    \18\ See Prepared Statement of the Federal Trade Commission, Before 
the Subcommittee on Interstate Commerce, Trade, and Tourism Committee 
on Commerce, Science, and Transportation, U.S. Senate (April 8, 2008), 
available at http://www.ftc.gov/os/testimony/P034101
reauth.pdf; Prepared Statement of the Federal Trade Commission, Before 
the Subcommittee on Interstate Commerce, Trade, and Tourism Committee 
on Commerce, Science, and Transportation U.S. Senate (Sept. 12, 2007), 
available at http://www.ftc.gov/os/testimony/070912
reauthorizationtestimony.pdf; Prepared Statement of the Federal Trade 
Commission On FTC Jurisdiction Over Broadband Internet Access Services, 
Before the Committee on the Judiciary, U.S. Senate (Jun. 14, 2006), 
available at http://www.ftc.gov/opa/2006/06/broadband.shtm; The 
Reauthorization of the Federal Trade Commission: Positioning the 
Commission for the Twenty-First Century: Hearing Before the Subcomm. on 
Commerce, Trade and Consumer Protection of the H. Comm. on Energy and 
Commerce, 108th Cong. (2003) (``FTC 2003 Reauthorization Hearing'') 
(statement of the FTC), available at http://www.ftc.gov/os/2003/06/
030611reauthhr.htm; see also FTC 2003 Reauthorization Hearing 
(statement of Thomas B. Leary, FTC Commissioner), available at http://
www.ftc.gov/os/2003/06/030611learyhr.htm; FTC Reauthorization Hearing: 
Before the Subcomm. on Consumer Affairs, Foreign Commerce, and Tourism 
of the S. Comm. on Commerce, Science, and Transportation, 107th Cong. 
(2002) (statement of Sheila F. Anthony, FTC Commissioner), available at 
http://www.ftc.gov/os/2002/07/sfareauthtest.htm.
---------------------------------------------------------------------------
    Prepaid calling cards are a case in point. In contrast to the State 
Attorneys General, who are able to bring enforcement actions to stop 
both telecommunications providers and distributors offering prepaid 
calling cards from engaging in unfair and deceptive practices, the FTC 
has targeted only the deceptive practices of prepaid calling card 
distributors, because of the FTC Act common carrier exemption. 
Furthermore, even when the Commission has identified and brought 
enforcement actions against non-common carriers, the common carrier 
exemption can impose additional litigation costs on the FTC. For 
example, as noted above, in both the Clifton Telecard Alliance and 
Alternatel cases, which the FTC has brought against distributors of 
prepaid calling cards, the defendants have moved to dismiss the FTC's 
cases on the grounds that the FTC has not sued and cannot sue the 
underlying carriers, which defendants allege to be necessary parties. 
While the Commission is confident that it will prevail in its 
opposition to these motions, the burden of having to respond to such 
motions is not insubstantial.
    The American public will benefit greatly from S. 2998's grant to 
the FTC of jurisdiction over common carriers in the prepaid calling 
card arena. The FTC respectfully continues to recommend that, rather 
than take a piecemeal approach to providing the FTC with jurisdiction 
in this important area of commerce, Congress repeal altogether the FTC 
Act exemption for common carriers subject to the Communications Act. 
The FTC has extensive expertise with such areas as advertising, 
marketing, billing, and collection, areas in which significant problems 
have emerged in the telecommunications industry.\19\ In addition, the 
FTC has powerful procedural and remedial tools that could be used 
effectively to address developing problems in the telecommunications 
industry if the FTC were authorized to reach them.
---------------------------------------------------------------------------
    \19\ For example, the FTC has brought numerous cases involving the 
cramming of unauthorized charges onto consumers phone bills. See, e.g., 
FTC v. Verity Int'l Ltd., 335 F. Supp. 2d 479 (S.D.N.Y. 2004), aff'd in 
part, rev'd in part, 443 F.3d 48 (2d Cir. 2006), cert. denied, 127 S. 
Ct. 1868 (2007); FTC v. Audiotex Connection, Inc., C-97 0726 (DRH) 
(E.D.N.Y. 1997); FTC v. Int'l Telemedia Assocs., Inc., 1-98-CV-1925 
(N.D. Ga., 1998); FTC v. Sheinkin, 2-00-363618 (D.S.C., 2000); FTC v. 
Mercury Marketing of Delaware, Inc., 00-CV-3281 (E.D. Pa. 2000); FTC v. 
Epixtar Corp., 03-CV-8511 (DAB) (S.D.N.Y. 2003); FTC v. Nationwide 
Connections, Inc., 06-80180-CIV-Ryskamp/Vitunack (S.D. Fla. 2006); FTC 
v. Websource Media, LLC, Civ. No. H-06-1980 (S.D. Tex. 2006).
---------------------------------------------------------------------------
VII. Conclusion
    The Commission will continue its aggressive law enforcement and 
consumer outreach and education programs in the prepaid calling card 
arena. The Commission thanks this Committee for focusing attention on 
this important issue and for the opportunity to discuss its law 
enforcement program.

    Senator Nelson. I am going to start asking questions of 
you, Mr. Chairman, and if you would then feel free to expand as 
much as you want with regard to your answers.

 STATEMENT OF HON. WILLIAM E. KOVACIC, CHAIRMAN, FEDERAL TRADE 
                         COMMUNICATION

    Mr. Kovacic. Great.
    Senator Nelson. I understand that the FTC has taken some 
actions to rein in some of these bad actors and the costs of 
entering this business are fairly low, and it seems like a lot 
of these bad actors may be able to get around the injunctions 
against them and consent decrees by reincorporating and moving 
on to safer regions or other states.
    So as these bad actors are trying to avoid the arm of the 
law, what do you need to do at the FTC to address this problem? 
Give us your thoughts as to whether we need to get the criminal 
justice system involved in going after these bad actors.
    Mr. Kovacic. Let me begin by thanking you, Mr. Chairman, 
Ranking Member Hutchison, for the privilege of speaking about 
this enormously high priority area of concern.
    I would say there are three things that we should focus on 
in considering the phenomenon that you mentioned.
    One is to continue our existing efforts to strengthen our 
compliance program. Over the past couple of years, we have 
devoted a lot of resources to increasing our ability to follow 
what happens to our existing orders and to identify instances 
in which people subject to our orders have violated them, and 
to make a point of going after recidivists both with our own 
resources and in cooperation with other enforcement agencies. I 
think we have converted what used to be a system of manual 
retrieval to an electronic database that lets us follow these 
folks along.
    Second, where there are recidivists who violate existing 
orders, I think you put your finger on a key consideration. 
Increasingly, we seek to engage the efforts of Federal and 
State officials who have the capacity to enforce infringements 
of that type as crimes. And it is our view that where the kind 
of misconduct that you and the Congressman have been describing 
is repeated, the only truly credible sanction is to take their 
freedom away because in many instances they dissipate assets. 
They hide them effectively so that the sanction that counts is 
the sanction that involves imprisonment. So greater cooperation 
through what we call our Criminal Liaison Unit, which is now 
roughly at its fifth anniversary, but expanded efforts of those 
types, and with your encouragement and cooperation, we will 
make that a focal point of what we do.
    Senator Nelson. Now, does that unit work with the U.S. 
Attorney?
    Mr. Kovacic. Yes, sir.
    Senator Nelson. And then the U.S. Attorney prosecutes the 
case.
    Mr. Kovacic. Precisely. The partnership that is developed 
is with the U.S. Attorney's Office with the Department of 
Justice, and with our state government counterparts. We assist 
in preparing the cases and they deliver them through their own 
efforts and through our cooperation. And I would be happy to 
share for the record later with you and your staff the 
extraordinary success that this cooperation has had in putting 
serious offenders in prison.
    Senator Nelson. Do you want to do that in testimony or 
submit it in writing?
    Mr. Kovacic. If I could submit that in writing to you, I 
would be delighted to do it. But your encouragement to continue 
on that path is very important.
    [The information referred to follows:]

    But there are a couple of ideas the Senate may want to consider 
including in its legislation. First, you can specify that the FTC can 
freely share and coordinate enforcement activities and complaint 
information with authorized State officials in affected States; for 
instance, State Attorneys General, State Commissions, and certain 
categories of statutorily authorized consumer advocates. At a minimum, 
complaint information could be shared with suitable advanced 
disclosures to the complainant specified. (Meaning the FTC should 
notify complainants--up front--orally or on the website--that 
information about their complaint may be shared with State authorities 
to facilitate resolution). Second, you can require that the FTC 
maintain the task force initiative. In his testimony, FTC Chairman 
Kovacic stated the task force was formed at his behest and is not 
statutory required. Should Chairman Kovacic step down from his post 
there is no guarantee that a successor would continue this 
collaborative effort. Memorializing Chairman Kovacic's task force 
innovative in law would provide consumers with higher level of 
protection from fraud and abuse.

    Mr. Kovacic. The third element I think is to improve our 
cooperation with our state and local government counterparts. 
Last year, with a number of people quite happily in this room 
whose efforts you will hear about later today, we formed a 
joint Federal-State task force. What we have come to understand 
is that in the archipelago of public institutions that work in 
this area, only if we link the islands together and work 
effectively will we be able to track and identify offenders no 
matter where they go within the United States. And 
increasingly, they exploit gaps in cross-border enforcement so 
that the cooperative effort has to involve not simply our 
partners at the state and local level.
    And as you have already heard today, our state counterparts 
have done wonderful things using their own authority. Someone 
you know quite well, Attorney General Bill McCollum in Florida, 
has done a fantastic job as well.
    But to deepen the integration of our efforts with our state 
counterparts because the sum of our efforts will be much 
greater if those are improved, and by having local authorities 
and state authorities work with us, sharing the resources we 
have, both access to information about infringements, access to 
information about existing orders, sharing information, we 
greatly increase the likelihood that individuals will not evade 
the force of the law simply by moving from one place to 
another.
    Those would be three key priorities for us.
    Senator Nelson. Tell us about standardized disclosure 
requirements. Would they help the Commission's enforcement 
efforts?
    Mr. Kovacic. I think the disclosure requirements that are 
spelled out in S. 2998 are an excellent foundation for 
providing standardized disclosures. I think those key 
ingredients adopted into law will be enormously useful. They 
address precisely the kinds of concerns that you identified in 
reviewing the card examples that we have seen today, that 
assist in overcoming the misleading representations or 
nonrepresentations that Congressman Engel just mentioned a 
moment ago. And I think S. 2998--simply adopting that menu of 
considerations into law--would be a great step toward providing 
greater assurance about what is actually associated with each 
of these transactions.
    Senator Nelson. What can the FTC do to collect more 
accurate information regarding the consumer complaints?
    Mr. Kovacic. We have got, I think, the framework of a 
superb system in place now. It is our Sentinel database through 
which a large number of government and nongovernment 
organizations now, again, owing to efforts that had been 
encouraged with enormous effectiveness by this committee, by 
this chamber, and by the House--to build Sentinel, which is an 
electronic database, we obtain information directly through 
complaints that come into our Complaint Center and through our 
state and local government enforcement counterparts. So we have 
not only an excellent repository now that collects information 
from a variety of streams--literally dozens of partners 
participate in this--but owing to resources, again, that 
Congress has generously provided us, we now have mechanisms for 
identifying almost in real-time patterns of misconduct.
    An important supplement to that is to increase our consumer 
education efforts, that is, to alert consumers about where to 
go. And this is where the point about economic disadvantage and 
vulnerability is terribly important. We realize that an 
increasing focus of our work has to be to reach populations 
that are not likely to go to public authorities, immigrant 
populations that are the victims of misconduct, minority 
individuals in poor communities who may have simply despaired 
at the prospect that public authorities of all types will 
assist them in matters of need.
    We are increasing our efforts through our Hispanic language 
initiative now, which is about 5 years old, where we are 
retooling many of our brochures that deal with prepaid calling 
cards to ensure Spanish language speakers inform us and 
exercise precautions on their own. To inform us, we are also 
developing efforts that we are pursuing now to work with a host 
of different organizations to reach populations that might not 
otherwise alert us to patterns of misconduct. So to expand 
these consumer education efforts, but in particular, to reach 
populations that for a variety of reasons, economic 
disadvantage, social disadvantage, historical disadvantage of 
all types, may simply not have confidence that public 
institutions at all levels of our government are willing to 
help out because if we can detect the misconduct, we now have 
the apparatus in place to identify problems quickly, to build 
the cooperative framework with our state and local counterparts 
and our counterparts at the Federal level to do something about 
it promptly.
    Senator Nelson. And are you doing an outreach to our 
military population?
    Mr. Kovacic. We are indeed. Under our Sentinel program, we 
have a cooperative program with the Department of Defense. One 
of our main partners is the Department of Defense. And a number 
of our projects involving not simply prepaid calling cards but 
other areas of concern involving consumer protection, financial 
practices, and others have our military service people as 
important focal points. And again, these are relationships that 
we can deepen and strengthen over time, but I am happy to 
report to you that the basic infrastructure to do that work is 
in place and is working now, but it can be enhanced.
    Senator Nelson. Describe how you have a mechanism as part 
of the task force for sharing the complaint information with 
State and local governments.
    Mr. Kovacic. Through the Sentinel system, our law 
enforcement counterparts are able to share and access 
information in those databases. That is a condition of 
participating. And these are secure systems, and the eligible 
participants, to obtain that information, are law enforcement 
authorities, public authorities with law enforcement 
responsibilities. They have access to this information.
    But it is, I think, again something you pointed to before. 
It is not simply the access to the raw information. It is 
building the personal relationships and the institutional 
networks that ensure that we share information about better 
practices and techniques about what is taking place, patterns 
we are observing, as well as enforcement techniques that put us 
in a better position to apprehend wrongdoers and sanction them.
    Senator Nelson. Now, some of these charges that they list 
are payments to the Federal Universal Service Fund and the pay 
phone owner compensation. How do you go about determining 
whether these calling card companies have remitted the money to 
these government entities or in the case of pay phone 
compensation, to the pay phone owners?
    Mr. Kovacic. Senator, that is an ingredient of the problem 
that we have not focused on. Typically the payments to the 
Universal Service Fund and the fulfillment of obligations have 
tended to be the province of our telecommunications regulators 
at the state and Federal level. That is a level of expertise, a 
specific concern we have not focused on. But we do work 
actively with our state and local counterparts involving 
telecommunications oversight on the other dimensions of the 
problem.
    Senator Nelson. And that would be in the case of Government 
as well where it might be the Federal Universal Service Fund?
    Mr. Kovacic. We tend not to focus on fulfillment of those 
obligations, but we do work actively with the Federal 
Communications Commission in sharing information, what we learn 
about the operation of the sector itself.
    Senator Nelson. It seems like that is important because 
that is another case of fraud about which a prosecutor needs to 
know.
    Mr. Kovacic. No question.
    Senator Nelson. What percentage of the total calling card 
market would you say constitutes these bad actors?
    Mr. Kovacic. Very hard to determine, Senator, and I do not 
know that we have attempted a precise calculation. It is about 
a $4 billion-plus a year sector. And as you and your colleagues 
and Congressman Engel have mentioned today, the vast bulk of 
activity in that sector is performed by legitimate enterprises.
    Our concern is that whatever the actual percentage of 
commerce accounted for by illegitimate enterprises is, it has 
the capacity to taint the entire sector. That is, if 
individuals repeatedly have bad experiences, it becomes very 
difficult for the legitimate enterprise to step forward and say 
you can trust me. ``My representations are honest. I am not 
going to cheat you.'' So the real hazard here, again, whatever 
the precise calculation is--and for the record, we would be 
glad to take our best stab at giving you our own estimate. 
Whatever it is, it has a unique capacity to taint the entire 
field, and that is the menace that we have to deal with.
    Senator Nelson. Are you getting cooperation from the good 
actors?
    Mr. Kovacic. Indeed, we are, sir. Yes. It is the good 
actors who help identify the nature of the problem. They have 
made suggestions about what to do about it. And I think for the 
very reason that you and Senator Hutchison mentioned 
originally, their own investments, their own good name is at 
stake. And if consumers believe that this is a bad commercial 
neighborhood, they will stay out completely and the others will 
suffer. They are helping us.
    Senator Nelson. A minute ago, you mentioned the activity of 
the states going after these bad actors. And I would like you 
to comment on what occurs if a state goes after them, the state 
gets them in a scenario that applies just to that state. So the 
bad actors move to another state. So the FTC is going to have 
to coordinate the activities of those state lawsuits when they 
raise the violation of section 5 of the FTC Act. Tell us about 
that.
    Mr. Kovacic. I think what we will certainly have to do is, 
first, to have a network that ensures that all of us are aware 
of the activity of each institution so that we have a sense of 
what the individual pieces of enforcement look like, but also a 
sense of how to develop a collective strategy about the timing 
and the prosecution of matters.
    One thing that increasingly has become part of our 
portfolio is what we call sweeps, where we work in cooperation 
with our State counterparts and sometimes our international 
counterparts where on a single day we will announce the 
prosecution or completion of literally dozens of matters 
involving a related practice. And these sweeps have become an 
extremely valuable tool to ensure that we get broad coverage 
and from the point of view of raising consciousness, the fact 
of bringing lots of them at once tends to generate lots of 
attention which ensures that the consequence of prosecution is 
greater deterrence.
    Senator Nelson. Do you want to comment on the controversial 
issue in the Committee on common carrier exemption?
    Mr. Kovacic. I would like to thank the Committee, to thank 
Senator Dorgan, to thank you, Mr. Chairman, for the 
possibilities in S. 2998 to permit us to operate much more 
extensively in instances in which a potential wrongdoer is a 
communications service provider that is a common carrier.
    As you know, there are other public institutions that have 
the capacity in some ways to do what we do, Federal and State. 
The reason we are keen on eliminating and attenuating these 
restrictions is that there are many instances in which we are 
dealing with firms that are not, we believe, common carriers, 
but they raise defenses that implicate the common carrier 
exemption. In the two matters that you are aware of, our two 
cases brought in the spring, Clifton Telecard and Alternatel, 
we are having to spend precious resources to defeat--and we 
believe we will--arguments that communications firms are 
necessary parties and must be brought into the lawsuit.
    In other instances, we see clear evidence of misconduct by 
firms that are unmistakably communication services providers. 
We cannot address those directly. We have to hand those off. 
And that handoff can be a source of fumbles, and it is not 
always clear that someone else will inevitably take the ball 
and run with it.
    We think that given the changes in the sector today, that 
if we have the capacity to deal universally across the country 
with not only the distributors of these cards whom we are 
dealing with in the Clifton and Alternatel cases, but also with 
telecommunication services providers, we have the ability to 
create a much more effective source of protection.
    And it is not to denigrate the work that other public 
institutions have done in any way. We are simply proud of the 
experience we built. If I can go back to the Delta or US 
Airways Shuttle example before, we have flown these routes in 
advertising and misleading conduct lots of times. And if it is 
a dark, rainy night on the northern approach coming down the 
Potomac, which we have done many times into National Airport, 
which has sort of a short runway, and you think about who you 
want in the cockpit, you want someone there with a little bit 
of gray in the temples who has done it a lot, who says this is 
the 2,500th landing I have made at National on a dark, rainy 
night.
    We have flown this route lots of times, and we think we are 
pretty good pilots when it comes to dealing with deceitful and 
misleading behavior so that there are other good pilots out 
there, but we think we can fly this route very well if we are 
given authority to fly over this part of the commercial space.
    Senator Nelson. So the bottom line is you support the 
legislation and you think it would be a step in the right 
direction.
    Mr. Kovacic. No question, Senator. We have some specific 
suggestions which we are happy to share with your staff and to 
continue to discuss with you about areas in which we think the 
legislation can be improved. There are some technical 
adjustments we would suggest. But we think the legislation is 
unmistakably a step ahead and a crucial element that you and 
the Committee appreciate quite well. Our regulatory frameworks 
need upgrades over time, and your colleagues, your counterparts 
in the House, understand this quite well, as Representative 
Engel just mentioned. And we see the adoption of this type of 
legislation as being the equivalent of getting the upgrades we 
need to make sure that the enforcement operating system works 
well over time.
    Senator Nelson. Well, thank you, Mr. Chairman. And without 
objection, part of the record will be the written material that 
you wanted to insert in the record.
    Mr. Kovacic. Thank you.
    Senator Nelson. And I thank you, and let me call up the 
second panel.
    Mr. Kovacic. Thank you very much for the chance to be here 
today.
    Senator Nelson. Thank you.
    We are happy to have Sally Greenberg, Gus West, Patricia 
Acampora, and Rosemary O'Brien. Sally Greenberg is the 
Executive Director of the National Consumers League. Gus West 
is the President of The Hispanic Institute. Patricia Acampora 
is Commissioner of the New York State Public Service 
Commission. Rosemary O'Brien is the Director of Marketing of 
Military Marketing.
    As stated in the previous panel, your written testimony 
will be included as part of the record.
    Senator Nelson. Mr. West and Ms. Greenberg, both of you 
have followed this issue for some period of time, and it seems 
that in the past couple of years, there has been a dramatic 
spike in the number of complaints against the bad actors in the 
industry. Can you tell us what factor is responsible for this 
increase in complaints? Is it the low cost of entry into this 
lucrative market? Is it the failure of regulators? What is your 
opinion? Ms. Greenberg?

  STATEMENT OF SALLY GREENBERG, EXECUTIVE DIRECTOR, NATIONAL 
                        CONSUMERS LEAGUE

    Ms. Greenberg. I do believe that the low cost of entry is a 
contributing factor. It is really easy to get in and out. It is 
easy to get out from under the lens of law enforcement. I have 
in my written statement a quote that I could not resist adding 
from one episode of The Sopranos where Tony Soprano is talking 
about how he and his cronies are in the business of prepaid 
calling cards and somebody else is left holding the bag. Very 
easy to get in, very easy to take people's money and run.
    One of the things that we are recommending in our testimony 
is that there be some bond that entrants to the market who are 
selling prepaid calling cards put up so that if law enforcement 
finds that the cards are not providing the minutes that are 
promised, that we have a place to go to look for and compensate 
consumers who have been ripped off or defrauded as a result of 
these cards. So I think that low barrier to entry is a real 
problem then. I think we could tackle that.
    [The prepared statement of Ms. Greenberg follows:]

      Prepared Statement of Sally Greenberg, Executive Director, 
                       National Consumers League
Introduction
    Good morning, Mr. Chairman. My name is Sally Greenberg and I am 
Executive Director of the National Consumers League. I appreciate this 
opportunity to appear before the Senate Committee on Commerce, Science, 
and Transportation to discuss the need for greater consumer protections 
in the purchase and use of prepaid calling cards. This largely 
unregulated consumer product is a ``Wild West'' of sellers and 
merchants who too often prey upon the most vulnerable consumers by 
promising minutes they don't deliver and loading up on hidden or 
undisclosed charges and fees. In an industry like this, with low 
barriers to entry and a totally unregulated market, you can be sure 
there will be unscrupulous operators who will take the money and run.
    The National Consumers League, whose founding in 1899 makes us the 
oldest consumer organization in the United States, has a longstanding 
interest in protecting consumers from fraudulent practices and is the 
only consumer group that operates a national fraud center. (The NCL's 
Fraud Center is described at www.fraud.org).
    I want to commend you, Senator Nelson, for your leadership in 
offering S. 2998, the Prepaid Calling Card Consumer Protection Act of 
2008. Consumers rely on you, an outspoken defender of consumer rights 
and protections, to look out for their interests. In my testimony, I 
will address some of the facts and figures describing the magnitude of 
the prepaid calling card industry and the large amounts of money 
involved. I'll discuss the fraud and deceptive practices associated 
with that industry and actions taken at the state and Federal levels in 
response to fraud I'll discuss why NCL supports your bill, S. 2998, and 
I'll make some policy recommendations. Our written testimony also 
includes a timeline detailing the growth of the industry and the rise 
in fraud associated with that growth.
    Let's start with the industry. It is illustrative that the shady 
practices of the prepaid calling industry were featured prominently on 
the HBO series, The Sopranos. In Episode 26, Tony is discussing the 
mob's work with prepaid cards. I've deleted the obscenities:

        Tony Soprano. ``So, telecommunications once again fails to 
        disappoint. What's this thing? Telephone calling cards. You 
        find a front man who can get a line of credit, you buy a couple 
        of million units of calling time from a carrier. You become 
        `acme telephone card company'. `Acme'. You're now in the 
        business of selling prepaid calling cards. Immigrants 
        especially, no offense. They're always calling back home to 
        whoever (deleted). And it's expensive, right? You sell 
        thousands of these cards to the (deleted), cards at a cut rate. 
        But you bought the bulk time on credit, remember? The carrier 
        gets stiffed. He cuts off the service to the card holders, but 
        you already sold all your cards. That's (deleted) beautiful! 
        (Laughing) it's a good one.''

    Of course, no one should conclude that the whole prepaid calling 
card industry is controlled by organized crime: we have no such 
evidence, but this vignette from The Sopranos demonstrates how easy it 
is to get into the industry, rip off consumers, and disappear with no 
accountability whatsoever. That must change.
Prepaid Calling Card Facts
   Prepaid cards are a $4 billion a year industry, responsible 
        for 11 billion calls in 2004.\1\

   The industry is estimated to reach $6.4 billion in revenue 
        in 2008.\2\

   Examples of fraudulent practices used by the prepaid 
        companies include ``hang-up fees,'' periodic maintenance fees, 
        destination surcharges, and high billing increments.\5\

   Companies that try to ``play by the rules'' are often 
        punished by a loss of market share due to fraudulent 
        carriers.\6\

   Only 11 states, including California, Connecticut, Florida, 
        and Illinois, currently have laws pertaining to calling card 
        fraud, specifically. Most turn to generic consumer protection 
        statutes, but enforcement has been extremely light.\7\

   Hispanic consumers may be losing up to $1 million per day 
        because of fraudulent phone cards.\4\

   The average calling card delivers only 60 percent of the 
        minutes promised, according to The Hispanic Institute, a non-
        profit research group.\3\

   The FTC's survey of prepaid calling cards confirms The 
        Hispanic Institute's findings. For instance, one calling card 
        tested by the FTC claimed to offer 360 minutes to Panama, but 
        only delivered 23 minutes of calling time. The FTC said that in 
        87 tests of the prepaid cards, the cards delivered an average 
        of only 50 percent of the advertised minutes.\8\

   The cost-per-minute rates for prepaid phone cards can be up 
        to 87 percent higher than expected. An expected call rate of 15 
        cents per minute, for example, may end up costing 28 cents per 
        minute.\9\

    Customer service representatives for prepaid calling cards are 
often unavailable or not knowledgeable regarding the prepaid phone 
cards their employers are selling. A 2005 University of Georgia study 
found that in a third of the calls to prepaid calling card customer 
service lines, callers couldn't reach a representative. When they did 
make contact, the representative often was unable to answer basic 
questions about fees or rounding up of minutes.\10\
Why We Need To Protect Users of Prepaid Calling Cards
    The rapid growth of the prepaid calling card industry combined 
with, until recently, a lax enforcement of consumer protection statues 
at the state and Federal levels, has enabled consumer fraud to 
flourish. Like so many other scams, the most frequent victims of the 
fraud and deception are the most vulnerable consumers: immigrants and 
the working poor; and those lower income Americans who often cannot 
afford or obtain regular phone service. These consumers rely on calling 
cards to stay in touch with friends and loved ones in the U.S. and 
abroad. Sadly, we believe that military families are also likely 
victims of the prepaid card scams and rip-offs.
    Yes, the cards provide these users with an alternative means of 
calling home, but many use false and deceptive practices in the 
process, and impose unconscionable terms. Fraud is fraud--if an 
automobile is sold with the promise of a sun roof and chrome wheels, it 
better have a sunroof and chrome wheels--if a phone card promises 500 
minutes to call El Salvador, it should deliver those 500 minutes.
    Some state attorneys general--notably in your state of Florida, 
Senator Nelson--have done a commendable job in prosecuting fraudulent 
prepaid card companies. The Federal Trade Commission has also conducted 
investigations and brought important cases against individual prepaid 
phone card providers. Unfortunately, these scattered efforts are 
insufficient. We need basic Federal protections to stem the tide of the 
many deceptive practices in this industry.
    NCL believes that FTC regulations, as called for S. 2998, would 
help to level the playing field for all phone card providers. Such 
regulations include requirements that prepaid phone card providers and 
distributors disclose the terms and conditions of the cards, and list 
the per minute rates, preferred international destination rates, and 
any fees or surcharges, in their advertising.
    We need a national floor of minimum requirements stating what 
industry practices won't be permitted. We applaud S. 2998's provisions 
preserving the rights of states to go forward with their own civil 
cases--as Florida did. The Federal Government should set minimum 
standards and permit states to go forward with provisions that don't 
conflict with the Federal law. That's a pro-consumer position and 
acknowledges the important role states have played in enacting and 
enforcing consumer protections.
    NCL believes that both your bill, Senator Nelson, S. 2998, and 
Congressman Elliot Engel's bill, H.R. 3402, would go far in addressing 
the false promises and deception associated with these cards. Anecdotal 
evidence suggests that the simple threat of regulation has already 
increased pressure on the prepaid calling card industry to reform its 
marketing practices.\12\ We've also seen evidence through the IDT 
settlement in Florida that if one company is forced to disclose 
accurately how many minutes a card will provide and what the surcharges 
and fees will be, they will lose market share to the other firms who 
are shading the truth. Therefore, we need to create a level playing 
field where all participants are required to provide accurate 
information.
Beyond Disclosure: What More Can We Do To Protect Consumers
    While NCL supports your efforts, Senator Nelson, to require full 
disclosure of terms and conditions on these prepaid calling cards, we 
find that the terms themselves, when they are disclosed, are too often 
unconscionable.
    For example, the text in fine print on the back of my $5.00 
``Africa Sky'' card states the following:

        All of the following fees will reduce the number of available 
        minutes and the value of the card. Use of a toll free number 
        from a pay phone will incur a $.99 per call fee. Per minute 
        rate will be $.02 higher for calls placed using toll free 
        access numbers. Call time for multiple calls is calculated by 
        rounding the last minute up to the closest multiple of 3 and 
        then adding 1 minute except that if your call lasts less than 1 
        minute you will be charged only for a minute. If available 
        minutes are not all used up on the first call the following 
        fees will apply: (1) the multiple call rate will be 40 percent 
        higher and will apply to all calls (see poster for details); 
        (2) a fee per call of $.59 will apply to each call; and (3) on 
        midnight after the first call a fee of $.69 will be deducted 
        and then weekly thereafter. Card Expires Three Months After 
        First Use . . . Rates and Fees are Introductory and are subject 
        to change anytime. . . .

    The same or similar text is found on most of the cards. So, though 
we have the terms disclosed, albeit in fine print, we have a company 
that is rapidly subtracting money from the user's original purchase. A 
40 percent higher rate is imposed after the first call; a fee of 59 
cents per call will apply to each one after the first call; and after 
midnight of the first call, the fee is 69 cents, which will be deducted 
weekly thereafter. This is from an original $5.00 card. No wonder users 
find that two or 3 weeks--or sooner--after first use, the card has no 
credit remaining. Notice the card also contains this catch-all phrase 
``Rates and Fees are Introductory and are subject to change anytime . . 
.'' leaving the card distributors the option of changing the rules 
whenever they wish.
    Worse still is the ``Majestic DMV'' Card I purchased for $2.00:

        (1) A $.99 fee applies on the 1st day of use and every 5 days 
        thereafter; (2) Calls made through tollfree access numbers are 
        subject to a fee of up to 4 cents a minute; (3) payphone 
        surcharge of $.99; (4) A destination surcharge of between 20-60 
        percent of the total call; and/or (5) a fee of $.10-$.99 for 
        connected calls, $.15/minute maximum domestic call rate (before 
        applicable charges and fees); minutes and/or seconds are billed 
        at a minimum of 1 minute and up to 5 minute increments, plus 
        any applicable fees. Card expires 3 months after first use or 
        12 months after activation.

    As a consumer advocate, I've often found it useful to look at 
consumer protection measures in other countries. I lived in Australia 2 
years ago and used prepaid cards for calls to the United States. My 
experience was uniformly positive--the Australian prepaid cards tended 
to deliver the minutes they promised, and they were good for multiple 
uses. Choice Magazine, Australia's counterpart to our Consumer Reports, 
tested these international calling cards and found that indeed, many 
delivered good value and low rates without connection fees or added 
charges. When I arrived back in the United States and began buying 
cards here, I found that their value tended to disappear after the 
first call. When I read the fine print, I understood why.
    I also consulted the document Consumer Protection in the European 
Union--Ten Basic Principles--and note that the Fifth Principle is 
relevant to our discussion of prepaid calling cards:

        Contracts Should Be Fair To Consumers

        Have you ever signed a contract without reading all the small 
        print? What if the small print says the deposit you just paid 
        is non-refundable--even if the company fails to deliver its 
        side of the bargain? What if it says you cannot cancel the 
        contract unless you pay the company an extortionate amount in 
        compensation? EU law says these types of unfair contract terms 
        are prohibited. Irrespective of which EU country you sign such 
        a contract in, EU law protects you from these sorts of abuses.

    We could apply the EU's notion of contract fairness to this issue. 
NCL supports S. 2998's disclosure requirements and hopes that they will 
satisfactorily address the problem of consumers paying good money for a 
prepaid calling card that fails to deliver the service. An open 
marketplace where all prepaid calling card companies are providing 
accurate information may do the trick; the market has a way of working 
very effectively when consumers have accurate information upon which to 
compare rates.
    NCL would like to suggest, however, that after passage of your 
bill, the FTC closely monitor the industry and in a year's time, report 
on whether disclosure is addressing the problem adequately.
    Diogenes called the market ``a place set apart where men can 
deceive each other.'' We must impose some limits on that paradigm. If 
after a year we still see failure to accurately disclose rates and 
unconscionable terms when the rates are disclosed, we would urge this 
Committee to consider stronger regulation of this industry.
NCL Policy Recommendations Related to Disclosure and S. 2998
    The National Consumers League strongly supports S. 2998 and its 
provisions to give enforcement authority to the Federal Trade 
Commission under the ``unfair or deceptive act or practice,'' clauses 
of the Federal Trade Commission Act. While prepaid calling cards 
generally offer savings on international long distance calling versus 
traditional ``Dial 1,'' 10-10 dial-around and wireless long distance 
calling,\13\ these savings are no excuse for fraud or deception.
    We also support FTC's call to appoint a monitor to oversee the 
prepaid calling card business,\14\ and a requirement that the FTC 
report back to Congress on a periodic basis regarding the status of its 
efforts to enforce the terms of the proposed legislation.
    As a general proposition, we applaud the requirements included in 
the Florida Attorney General's June 2008 settlement with prepaid card 
companies, such as:

   Ceasing all deceptive advertising.

   Providing 100 percent of the minutes advertised.

   Not using hidden fees or misleading minute calculations to 
        increase their profits at consumers' expense.

   Printing disclosures for a given card in any language used 
        to advertise that card.

   Printing the exact number of minutes available and the 
        card's expiration date (if applicable) on the card.

   Prohibiting naming of card surcharges to resemble taxes.

   Requiring one-minute increment billing.

    While S. 2998 requires that the disclosure text on the calling card 
itself, packaging, or other promotional material (including online) be 
in same language used to advertise the card, we would recommending 
expanding Sec. 3.(b)(4) of the bill to require that prepaid phone card 
providers provide toll-free customer service lines staffed by customer 
service representatives able to converse in the languages that the 
cards are advertised in.
Further Recommended Action If Disclosure Requirements Are Not 
        Sufficient
    If after 1 year, the FTC reports back to Congress with evidence 
indicating that greater disclosure is not reducing the consumer abuses 
in the industry, we recommend that further action be considered by this 
Committee, with the Federal Trade Commission given the authority to 
enforce these provisions:

   Require all market entrants to be licensed and post a bond 
        before marketing cards to consumers. That bond would go into a 
        fund to compensate consumers who are victims of fraud. Those 
        companies that market prepaid calling cards should also be 
        required to provide a name, address and place of incorporation. 
        Right now, the barriers to entry are so low and the penalties 
        for not making good on the value of the cards are so minimal 
        that it's simply open season on consumers. We believe requiring 
        a bond will act to keep many bad actors out of the industry.

   Require all market entrants to have a 24 hour, 7 days a week 
        toll free number that has a live person on the other end who 
        must be knowledgeable about the use of the card.

   Require that fees and surcharges imposed be related to 
        actual costs. Congress has imposed rules on other industries 
        that were charging consumers outrageous fees--the moving van 
        industry, payday lenders, and funeral homes, to name a few. If, 
        in a year's time, this Committee finds that disclosure is not 
        easing the deception and rip-offs that plague this industry, 
        the Committee should consider imposing stronger regulations on 
        prepaid calling card companies and the many fees and surcharges 
        they impose on consumers.

   Require that all cards have an expiration date and that this 
        date be no shorter than 1 year after activation. If a seller 
        fails to make a disclosure on expiration, the card should be 
        valid indefinitely.

   Require sellers to list the minimum charge per call and the 
        balance in minutes and dollars remaining on the card.

   Require sellers to inform consumers, via a website or toll-
        free phone number, of any proposed changes in terms and 
        conditions, with consumers given the chance to reject these 
        changes and receive a refund on the card with no fee imposed 
        for requesting such a refund within an appropriate grace period 
        of no less than 30 days after posting of the proposed change. 
        Prepaid calling card providers should also be required to 
        prominently list a mailing address to which customers can 
        direct refund requests and/or a website with a refund form that 
        the consumer can access easily.

   Require uniform terms in all prepaid calling card contracts 
        so that consumers can comparison shop. Companies should not be 
        allowed to confuse consumers by using a variety of terms for 
        charges such as ``administrative fee'' or ``service fee.''

   The amounts involved in prepaid phone card transactions are 
        too small for any one individual to bring a case to court. The 
        only meaningful way to allow consumers to hold prepaid card 
        sellers accountable is through use of the class action process. 
        Consumers need to be guaranteed a private right of action and 
        the ability to band together as a class to bring cases against 
        dishonest prepaid phone card providers.
Conclusion
    We strongly support S. 2998 and commend this Committee for holding 
the hearing today. By requiring much better disclosure on prepaid 
calling cards, this bill will help to mitigate the deception and fraud 
associated with these cards. We also support further monitoring of the 
industry by the FTC, which will in turn report to the Members of this 
Committee.
    NCL also urges Congress to find a way to require that prepaid 
calling card companies go beyond simple disclosure of their onerous 
rates. The most vulnerable consumers--military families, immigrants, 
low-income families--rely on these cards and spend their hard-earned 
money only to see the value of the cards disappear quickly after first 
use. NCL believes we can do better by consumers. We support the 
disclosure required under this bill and hope that it works. If we need 
to take stronger action, this bill's requirements will represent an 
excellent first step.
    Thank you, Mr. Chairman, for giving the National Consumers League 
this opportunity to comment on your bill. We commend you for your pro-
consumer record and look forward to working with you and your staff to 
see this bill enacted into law.
Issue Timeline
    We have provided a timeline of enforcement actions and legal 
settlements pertaining to prepaid calling cards below.

------------------------------------------------------------------------

------------------------------------------------------------------------
1986                               Prepaid calling cards introduced to
                                    the North American market.\15\
------------------------------------------------------------------------
1996                               U.S. prepaid card sales reach $1.1
                                    billion.\16\
------------------------------------------------------------------------
April 2001                         New York Attorney General Eliot
                                    Spitzer announces settlement with
                                    five companies accused of
                                    deceptively marketing prepaid
                                    telephone cards throughout upstate
                                    New York. This settlement was part
                                    of Spitzer's ongoing efforts to
                                    combat illegal marketing practices
                                    of prepaid phone card companies
                                    dating back to 1999.\17\
------------------------------------------------------------------------
2006                               Newark, NJ-based IDT Corp., the
                                    largest prepaid calling card company
                                    in the U.S. reports $2.2 billion in
                                    total sales.\18\
------------------------------------------------------------------------
2007                               U.S. prepaid market reaches $4
                                    billion in revenue.
------------------------------------------------------------------------
January 2007                       IDT Corp. settles Federal class
                                    action suit brought on behalf of
                                    hundreds of phone card customers
                                    alleging fraudulent and deceptive
                                    advertising practices.\19\
------------------------------------------------------------------------
March 2007                         IDT files lawsuit against 9
                                    competitors, alleging that they
                                    provide 40 percent less time than
                                    advertised. Epana Networks, Dollar
                                    Phone, and Locus Telecommunications
                                    quickly reach settlement with IDT,
                                    agreeing to cease any misleading
                                    marketing practices. Six other
                                    companies named in the suit,
                                    including CVT Prepaid Solutions Inc.
                                    issue an open letter to the
                                    industry, claiming that IDT's suit
                                    is ``nothing but an underhanded ploy
                                    to regain lost market share by
                                    intimidation.'' \20\
------------------------------------------------------------------------


------------------------------------------------------------------------

-----------------------------------------------------------------------
July 2007                          Florida Attorney General Bill
                                    McCollum announces investigation of
                                    10 prepaid calling card companies
                                    for fraudulent or deceptive
                                    advertising.\21\
------------------------------------------------------------------------
August 2007                        Representative Eliot Engel (D-NY)
                                    introduces H.R. 3402 ``Calling Card
                                    Consumer Protection Act.'' \22\
------------------------------------------------------------------------
March 2008                         FTC asks U.S. District Court for the
                                    District of New Jersey to halt
                                    allegedly illegal marketing
                                    practices of prepaid card companies
                                    CTA Inc., Clifton Telecard Alliance
                                    One LLC, and Mustafa Qattous.\23\
------------------------------------------------------------------------
May 8, 2008                        Senator Bill Nelson (D-FL) introduces
                                    S. 2998 ``Prepaid Calling Card
                                    Consumer Protection Act of 2008.''
                                    \24\
------------------------------------------------------------------------
May 23, 2008                       Texas Attorney General Greg Abbott
                                    announces filing of legal
                                    enforcement action against prepaid
                                    calling card company Next-G
                                    Communications, Inc. over allegedly
                                    deceptive marketing practices
                                    employed by the company.\25\
------------------------------------------------------------------------

Endnotes
    \1\ ``THI Praises FTC for Standing Against Calling Card Fraud,'' 
The Hispanic Institute. 2007. Retrieved on July 24, 2008.
    \2\ ``Prepaid Calling Cards: Market Dynamics and Forecast 2003-
2008,'' ATLANTIC-ACM. February 2003. Retrieved on July 25, 2008.
    \3\ Ibid.
    \4\ ``Facts and Figures,'' The Hispanic Institute. Retrieved on 
July 24, 2008.
    \5\ Office of the Attorney General of Florida (June 11, 2008). 
``McCollum Announces Prepaid Calling Card Settlements, Industry-Wide 
Reform''. Press release. Retrieved on July 24, 2008.
    \6\ Holden, Diana. ``Calling Out Prepaid Phone Cards,'' 
BusinessWeek. July 9, 2008. Retrieved July 24, 2008.
    \7\ ``Facts and Figures,'' The Hispanic Institute. Retrieved on 
July 24, 2008.
    \8\ Dang, Dan Thanh. ``Avoid These Prepaid Calling Cards, FTC 
says,'' Baltimore Sun. June 6, 2008. Retrieved July 24, 2008.
    \9\ Horton, Denise. ``Prepaid Phone Cards: Caller Beware,'' 
University of Georgia Research Magazine. Fall 2005. Retrieved on July 
24, 2008.
    \10\ Ibid.
    \11\ ``Calling Card Questions & Answers,'' The Hispanic Institute. 
Retrieved on July 25, 2008.
    \12\ Marshalian, Jonathan. ``You've Come a Long Way, Baby,'' The 
Prepaid Press. September 17, 2007. Retrieved July 25, 2008.
    \13\ ``Facts and Figures,'' The Hispanic Institute. Retrieved on 
July 24, 2008.
    \14\ Federal Trade Commission (March 26, 2008). ``FTC Asks Court to 
Halt Prepaid Calling Card Scam; Alleges Consumers Receive Fewer Calling 
Minutes Than Advertised and Pay Hidden Fees''. Press release. Retrieved 
on July 24, 2008.
    \15\ Frost and Sullivan. ``North American Prepaid Calling Cards 
Market,'' August 10, 2006. Retrieved on July 25, 2008.
    \16\ ``Prepaid Phone Cards: The Facts,'' State of New York Attorney 
General. Retrieved on July 25, 2008.
    \17\ Office of the New York State Attorney General (April 11, 
2001). ``Prepaid Phone Card Sweep Cleans Up Deceptive Posters''. Press 
release. Retrieved on July 25, 2008.
    \18\ ``Talk Isn't So Cheap,'' BusinessWeek. July 23, 2007. 
Retrieved on July 25, 2008.
    \19\ IDT Corporation (January 25, 2007). ``IDT Reaches a Settlement 
in Calling Card Class Action Lawsuit''. Press release. Retrieved on 
July 25, 2008.
    \20\ Hatcher, Monica. ``McCollum probes calling card deceptions,'' 
The Miami Herald. July 24, 2007.
    \21\ Hatcher, Monica. ``McCollum probes calling card deceptions,'' 
The Miami Herald. July 24, 2007.
    \22\ U.S. House. 110th Congress, 1st session. H.R. 3402, Calling 
Card Consumer Protection Act. Online. Thomas.gov. Available at http://
www.thomas.gov/cgi-bin/bdquery/z?d110:HR03402
:@@@L&summ2=m& [Retrieved on July 25, 2008].
    \23\ Federal Trade Commission (March 26, 2008). ``FTC Asks Court to 
Halt Prepaid Calling Card Scam; Alleges Consumers Receive Fewer Calling 
Minutes Than Advertised and Pay Hidden Fees''. Press release. Retrieved 
on July 25, 2008.
    \24\ U.S. Senate. 110th Congress, 2nd session. S. 2998, Prepaid 
Calling Card Consumer Protection Act of 2008. Online. Thomas.gov. 
Available at http://www.thomas.gov/cgi-bin/query/F?c110:1:./temp/ 
c110YZkszS:e930: [Retrieved on July 25, 2008].
    \25\ Attorney General of Texas (May 23, 2008). ``Attorney General 
Abbott Takes Legal Action Against Prepaid Calling Card Company''. Press 
Release. Retrieved on July 25, 2008.

    Senator Nelson. Mr. West?

STATEMENT OF GUS K. WEST, PRESIDENT AND CHAIRMAN OF THE BOARD, 
                     THE HISPANIC INSTITUTE

    Mr. West. Mr. Chairman, I do not know that we necessarily 
at The Hispanic Institute would want to make it harder to do 
business. We sort of believe that the problem really lies in 
the enforcement. It seems that these fraudulent practices are 
illegal at the Federal, State, and local level already, and it 
just needs to be enforced. Feedback that we have gotten from a 
few of the companies is that they were not going to change 
their practice until the enforcement was stepped up, until they 
were forced to deliver what they are promising.
    [The prepared statement of Mr. West follows:]

Prepared Statement of Gus K. West, President and Chairman of the Board, 

                         The Hispanic Institute
    Mr. Chairman and distinguished Senators of the Commerce Committee, 
my name is Gus West, President and Board Chair of The Hispanic 
Institute, a Washington D.C. based non-profit. Thank you for inviting 
us here today to give testimony regarding international prepaid calling 
cards. These calling cards are an economical way to make international 
phone calls. In the United States, Latinos purchase and use these cards 
more frequently than any other group. The cards are used primarily to 
talk with family, friends, and relations.
    These cards are sold in neighborhood stores/tiendas/bodegas. We all 
have seen posters in the windows of these stores, advertising the cost 
of a certain number of minutes to a particular country. The cards are 
normally in boxes behind the cashier and the customer is able to select 
the card they wish to purchase. On the back of each card is an 800-
number and a PIN number assigned to the card. One calls the 800-number, 
enters the PIN number, the international phone number desired, and then 
receives a message telling the caller how many minutes he has for a 
phone call.
    We have tested hundreds of these cards and have found that on 
average these cards deliver about half the minutes promised. In an 
effort to have the most objective analysis we hired a private firm, 
Washington-based Network Analytics, to conduct testing of international 
prepaid calling cards sold in the Florida, New York and the Washington 
D.C. markets. I have a copy of our study here today and it is posted on 
our website at www.thehispanicinstitute.net. The conclusions of the 
independent study mirror the results of the internal testing that we 
conducted at The Hispanic Institute.
    I have been using these cards myself, and been cheated out of 
minutes. In my current role as Chairman of The Hispanic Institute, I 
have often been asked by reporters if we could put them in contact with 
other victims of this fraud. I ask them to go to anyone of these 
neighborhood stores where these cards are sold, and ask anyone you see 
buying these cards, if they have been cheated out of call minutes. You 
will find that 100 percent of the people who use these cards will tell 
you that they have been cheated out of minutes.
    The most popular cards, the ones that are purchased most often, are 
the $2 and $5 cards. While losing money on a $2 or $5 card may seem 
minimal to some, it can be significant to a low wage earning family. 
For reasons such as language, income, and lack of familiarity with 
regulations the users of these cards have had little recourse to 
address this fraud by a billion dollar industry.
    This is false advertising and it is illegal under existing Federal, 
state, and local laws. Moreover, we believe that other industries 
intentionally prey on Hispanics when advertising in Spanish as the 
majority of advertising for prepaid calling cards is done.
    THI has been highlighting this issue for well over a year now. 
While several State Attorneys General, State Legislatures, and the 
Federal Trade Commission have begun to take action against calling card 
fraud we have not seen any measurable improvement in this situation. We 
look forward to the day when consumers in the United States can be 
protected against this kind of fraud. Thank you.
                                 ______
                                 
                           Hispanic Institute

                  Calling Card Verification Test Plan

               Provided by: Network Analytics Corporation

Objective
    The purpose of this testing is to determine if calls to certain 
destinations using commercially available prepaid calling cards are 
providing the amount of minutes specified by the card providers.
Methodology
    Call generators will be used to place the calls via the calling 
card and complete the call to the destination call generators. Every 
attempt will be made to use all the available time in a single call. If 
this is not successful, most commonly due to quality of the line and 
drops, additional calls will be made to the same destination until all 
the remaining balance in the cards is used. Each call is recorded by 
the units in order to interpret the amount of minutes announced by the 
calling card platform.
Units
    The testing will be performed using Call Generators (CallWave) in 
the U.S. (Washington, D.C. and New York lines) and terminating to Call 
Generators (CallWave) with Mexico and Guatemala numbers.
Cards
    The following calling cards will be used:

        Florida ($5)--Telmex Companero, STI Florida, Touch-Tel 
        Hondurena, Touch-Tel Guatemalteca, Touch-Tel Salvadorena, 
        Dollar Phone Coffee Time, Dollar Phone Rey, MPTA Florida Idol, 
        MPTA Nine, PCI Pilot, PCI Prima and TST Si Pues.

        New York ($2)--Diamond Bingo, Diamond Arenque, SDI I Love NY, 
        Lycatel Success, Lycatel Call Me, STI World, RTG Martini, RTG 
        Cocktail and IDT Play Ball.

        Washington, D.C. ($2)--IDT Boss

        Toll Free ($5)--GEO Florida

    Two cards of each are provided in order to attempt to test to each 
destination with each card.
Test Deployment
    The following are the numbers for the lines used:

        Washington Originated calls: (202) 609-9875 and (202) 244-1066

        New York Originated calls: (917) 779-8197

        Mexico Termination: +525585256265

        Guatemala Termination: +50222630419
Test Scope
    The testing will provide the following data for each call:

------------------------------------------------------------------------

------------------------------------------------------------------------
Seq. Number                        Disconnect Reason
Date                               Call Duration Recording (Sec)
Time                               Call Duration Trace
Card Vendor                        Call Duration Destination carrier CDR
                                    (Sec)
Card Name                          Call Duration Minutes
Card Denomination                  PAMS Score LQ
Card Code                          PAMS Score LE
Originating Number Area Code       Per call Extra Charge (Using Next
 (City)                             Call's announced balance)
Originating Number                 Next Call Announced Balance
Access Number Dialed               Card indicated connection fee
Destination Country                Card indicated Rounding Increments
Destination Number                 Card indicated maintenance fee
Destination Cell or Landline       Toll-Free use surcharge
From Number shown at destination   Calculated p/min charge based on 1st
                                    call announcements
Announced Balance $                CCR
Announced Balance (minutes)        AVE PDD
Rate Per Minute                    AVE Extra Charge
Minutes Not Provided (If call      AVE PAMS LQ
 used all balance)
Recording file name                AVE PAMS LE
End of Dial Time                   Total Minutes provided
Call Progress detection time       Completed Calls
Post Dial Delay                    Actual p/minute rate experienced
Call Disposition                   Total Minutes announced
Call Answer Time                   Percentage provided vs. announced
Call End Time                      Minutes Not Provided (If call used
                                    all balance)
Warning Provided                   Percentage provided vs. announced
                                    (last call)
------------------------------------------------------------------------

    This information is provided from:

   The originating carrier's Call Detail Record

   Terminating Carrier's Call Detail Record

   Call Generator (CallWave) Trace files

   Listening to the Recordings created for each call

   Terms written on each card
Results
   Test calls were placed between November 12 and December 08, 
        2007.

   From a total of 45 cards tested, 7 encountered completion 
        rate of 0 percent and could never reach the intended 
        destination while another 8 encountered 50 percent or less of 
        CCR.

   Only 15 cards achieved the goal of utilizing the entire time 
        balance provided in a single call. Out of those, only 4 (27 
        percent) provided the entire balance announced to the customer 
        and 6 others (40 percent) provided 50 percent or less of the 
        time announced.

    The following chart provides information about the Call Completion 
Rate provided by each of the cards, sorted by highest (better) to 
lowest (worst).
                      Call Completion Rate (CCR%)


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The following chart provides information about the Average Post 
Dial Delay provided by each of the cards, sorted by lowest (better) to 
highest (worst).
                     Post Dial Delay (PDD Seconds)


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The following chart provides information about the Average 
Listening Quality provided by each of the cards, sorted by highest 
(better) to lowest (worst).
                         PAMS Listening Quality


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The following chart provides information about the Percentage of 
minutes provided versus minutes announced by each of the cards when all 
minutes were used in a single call, sorted by highest (better) to 
lowest (worst).
               Percentage Provided vs. Announced (1 call)


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    The following chart provides information about the Percentage of 
minutes provided versus minutes announced by each of the cards when 
considering only the last call placed in which the last remaining 
announced balance was used, sorted by highest (better) to lowest 
(worst).
             Percentage Provided vs. Announced (last call)


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Nelson. Ms. O'Brien, you were nodding your head.

         STATEMENT OF ROSEMARY G. O'BRIEN, PRESIDENT, 
                     MILITARY MARKETING LLC

    Ms. O'Brien. Yes, sir. I agree with Mr. West that 
enforcement is key here. You already have lots of legislation 
and rulemaking around this. What is critically important is 
that the bad actors are brought to a competent body to account 
for their actions. Generally speaking, I think the vast 
majority of the prepaid industry is considerably reputable and 
makes full disclosure. But I think that there are populations 
that are disproportionately affected by the bad actors. And we 
know where to find them. Let us find them and do what we need 
to do. Enforcement is key.
    [The prepared statement of Ms. O'Brien follows:]

         Prepared Statement of Rosemary G. O'Brien, President, 
                         Military Marketing LLC
    Thank you for your invitation to speak to the Committee about the 
military and the prepaid card industry. My name is Rosemary Grace 
O'Brien. I have a Military Marketing practice located in New York City.
    I would like to briefly summarize my background which qualifies me 
to speak with you today. My professional career is deeply rooted in 
telecommunications. It began back in 1981 with work performed for NY 
Telephone. It continued uninterrupted with major and on-going 
assignments from NYNEX, Southern New England Telephone, Southwestern 
Bell, and a handful of telecom start-ups made possible by divestiture 
in 1984. Eventually in 1997 I joined AT&T for a period of 7.5 years. 
That experience is most relevant to your agenda today.
    My work at AT&T was as General Manager of their worldwide Military 
business. To be clear, not mission critical communications, rather my 
team and I had the responsibility of providing Personal 
Telecommunications Services--in-room phone service in barracks, 
dedicated public payphones on military installations in 18 countries, 
on larger U.S. Navy and Coast Guard ships, and in Forward-Deployed 
locations, such as Bosnia and Kuwait, and eventually Iraq and 
Afghanistan.
    My job was to make sure Soldiers, Sailors, Airmen, Marines, and 
Coastguardsmen were aware of the special plans and programs AT&T built 
just for the military, how they could access them, and the best methods 
to pay for them. My mission was to be sure that servicemembers always 
had a way to call home, to reach family and friends no matter where 
they lived or served our country. At its peak, the business comprised 
11 ``platforms'' with prepaid cards representing just one of them. AT&T 
secured the right and obligation to provide these services through 
contracts it won in several competitive bidding processes conducted by 
the Military Exchanges. It spent millions of dollars of capital 
building out infrastructure, and millions more educating the military 
community through informative advertising, in-person briefings, and 
other methods to build awareness of all products and services.
    You probably already know that servicemembers are intense 
communicators. They spend more on communications than the average 
American. Much more . . . The ability to talk to loved ones is a 
critically important quality of life issue, to their sense of well-
being and the peace of mind of their families. Let's face it, military 
life can be lonely, and dangerous. Separations from family and friends 
are especially difficult. So while it is still possible to write 
letters, and today, to send and receive e-mails, there is just no 
substitute for the human voice. Communications is essential and that 
fact will never change. That's the key reason why prepaid cards are so 
essential in the military.
    The second reason, is equally as important, but completely 
practical. First, think back if you can, to when there were no prepaid 
cards or cell phones, how did you pay for a call when you were away 
from your home or office? Either you deposited change into the 
payphone, or if you were lucky enough to have home phone service, you 
could get a special calling card--a subscriber card--that allowed you 
to charge payphone calls to your home phone bill. If you were desperate 
or didn't care what it cost, you paid with a credit card.
    Well cash is impractical for long distance calls, especially from 
foreign countries. Credit cards are not an affordable option. 
Subscriber calling cards are helpful, but they come with some 
limitations.
    First, you need to have a home phone to get one. Soldiers who live 
in tents, in barracks, on ships, or overseas, do not necessarily have a 
U.S. home phone.
    Second, the cost of aggregating the call data related to your card, 
so the carrier can render and collect a bill, needs to be built into 
the cost of each call.
    Third, a calling card does not have a mechanism that allows the 
user to understand how much he is spending, or has already spent this 
month.
    Prepaid cards became popular in the military, and remain so today, 
because prepaid cards effectively address all of these issues. Anyone 
can buy a prepaid card. Prepaid cards makes calls cheaper than calling 
cards. And prepaid cards enable the service member to budget himself.
    In the military, service members mostly buy cards at their military 
exchanges. Troops have a fairly sophisticated understanding of how to 
use the card so that they get the most from it. For example, generally 
speaking, when a card is used to call back to the United States from a 
foreign country, multiple units, or minutes are deducted for each 
minute of talk time. No surprise, international calls are more 
expensive. Multiple minutes is a way to recover the true cost of the 
call. Troops know this. Servicemembers recognize that, whenever 
possible, they should use the Defense Secure Network when calling the 
U.S. from a foreign country, because this enables them to a get a 
``free ride'' back to the U.S., where a domestic operator helps them 
place a call and their minutes are deducted one for one, as if the call 
originated in the U.S.
    The Military Exchanges recognized the need for prepaid cards and 
have done an excellent job of procuring cards for service members. 
That's why the cards that the Exchanges sell have the lowest rates from 
the countries that military people call from the most--Iraq, 
Afghanistan, Germany, Italy, Japan, etc. And their high value cards 
offer a better rate to servicemembers than the big box retailers who 
dwarf them in size. I believe the cost of a payphone call from Iraq to 
the U.S. is about 16 cents per minute. I cannot make a call from one 
side of Manhattan to the other for that little money, using a card I 
bought at Sam's Club or Wal-Mart, or another big box retailer.
    Every retailer, when he buys the prepaid cards that will be sold in 
his store, considers his customer base; and as prepaid cards are 
typically custom-built, he builds his prepaid cards to satisfy his 
audience. And he sets the retail price for the cards he sells. That is 
sometimes where the trouble comes in. If a card that is built to be 
optimal (lowest) for calls from the U.S. to Mexico, is used to make a 
call from the U.S. to Korea, chances are good the call to Korea will be 
unexpectedly expensive. Or when a patriotic-minded American goes to his 
favorite big box retailer, buys a card made by a reputable carrier, and 
sends it to his grandson in Iraq, it is important to know that card, 
made by a reputable company will never offer as good a deal as the card 
that the Military Exchange sells to that soldier. And that soldier may 
complain to his wife about how little talk time he received from 
grandpa's card compared to his Exchange card. And his wife, frustrated 
at her circumstances and missing her husband and the father of her 
children, may write you a letter complaining about how that reputable 
carrier is ripping off soldiers. But it is just not true . . . because 
it is likely that the card that grandpa sent was never meant for 
international inbound calls. But that does not stop them from writing 
their Congressman, or their local newspaper, or tv consumer advocate. I 
handled many of these complaints in my tenure with AT&T. Those kinds of 
stories should not ordinarily be a cause for overreaction on your part.
    However, I do encourage you to look closely and carefully so you 
can distinguish the needs of the reputable carriers who do an excellent 
job of making full disclosure, from the bottom feeders in the prepaid 
industry who have the ability to give the product or its maker a bad 
reputation. They prey on ignorance and inexperience, by deliberately 
tricking out their cards with inordinately short expiration dates, or 
come-on rates for one country with very high rates for all others, or 
very low-advertised rates that come with high, one-time surcharges. 
Their goal is to produce a product that allows them to enjoy very 
large, gross profits. I, for one, would support your carefully 
constructed plans to reign in prepaid chicanery, but would complain 
strongly about any Band-Aid attempts that do not fully consider the 
underlying elements of the prepaid business.
    Thank you.

    Senator Nelson. Ms. Acampora, the joint Federal-State 
slamming enforcement regime is often mentioned as a good 
example of a Federal-State partnership. Do you think that the 
model of Federal rules within the joint Federal-State 
enforcement regime works in this prepaid calling card scam?

            STATEMENT OF HON. PATRICIA L. ACAMPORA,

       COMMISSIONER, PUBLIC SERVICE COMMISSION, STATE OF

        NEW YORK; MEMBER, COMMITTEE ON CONSUMER AFFAIRS,

    NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

    Ms. Acampora. I think that, yes, it will work, and your 
legislation we believe is very well put together--we added some 
thoughts in our testimony that I have given to the Committee on 
this--but your bill allows your constituents to continue to use 
and exploit existing State enforcement mechanisms. As we know, 
State Government is a little bit more convenient to relate to 
rather than the Federal Government because of geography and 
also time changes between Washington and the various states. As 
you know, California usually has a problem with a lot of 
complaint litigation because of the time differences.
    It also helps, I believe, in times where the economy is so 
stretched. It enables the Federal Government and the State 
government to leverage scarce resources and join together to be 
able to do that.
    And of course, it is always nice to leave our State 
``cops'' on the beat which can only maximize the odds that the 
bad actors will be punished and will be caught expeditiously. 
And I think that in the future, with your bill, the bad actors 
will face more enforcement--because of this state cooperation, 
and your constituents will get their grievances addressed quite 
quickly.
    And I think that the FCC has and continues to coordinate 
well with our national association of regulators which is 
called NARUC, and the members of NARUC on these issues. And the 
FCC--I'm talking about slamming enforcement--helped coordinate 
and it works with NARUC. It has conference calls.
    And I think in speaking to the Chairman from the FTC, that 
the FTC has set up a similar task force on these issues as was 
set up with slamming with the states at the FCC. This will work 
quite well. And we really do look forward to working with the 
FTC as presently right now, there is more of a coordination 
with the Attorneys General, and I think it would help and 
assist if NARUC was also reached out to and could participate 
as a member of that task force.
    Senator Nelson. Is that organization something that could 
help us on State registration requirements and bonding 
requirements?
    Ms. Acampora. Well, we certainly would have--we have the 
staff and we have the ability to work with you to let you see 
what the various states have on the books. Right now, we have a 
few states that do have legislation. California has laws. New 
York certainly does, and some other states still do not. So I 
think it would be important that NARUC provide you with a lot 
of information that would make your job a little bit easier.

 Prepared Statement of Hon. Patricia L. Acampora, Commissioner, Public 
 Service Commission, State of New York; Member, Committee on Consumer 
   Affairs, National Association of Regulatory Utility Commissioners
Introduction
    Chairman Inouye, Vice Chair Hutchison and Members of the Committee, 
I appreciate the opportunity to testify today on consumer protection in 
the prepaid calling card market. This is an important piece of 
legislation for your constituents. I thank you for calling this hearing 
and commend Senator Nelson, the sponsors of the bill, and the Members 
of this Committee for your leadership on this important consumer issue.
    My name is Patricia Acampora. I am a Commissioner of the New York 
State Public Service Commission and a member of the National 
Association of Regulatory Utility Commissioners' (NARUC) Committee on 
Consumer Affairs. NARUC represents the State utility commissioners in 
each of your states and the U.S. territories that have oversight 
responsibilities over all the critical utility infrastructures--
telecommunications, energy, and water. NARUC has not yet established a 
specific position on national standards for prepaid calling card 
services, but we do have well-established positions on specific issues 
raised by the Prepaid Calling Card Consumer Protection Act of 2008 (S. 
2998).
    As early as July 31, 2002, the NARUC Board of Directors adopted a 
resolution indicating that ``consumers of all telecommunications 
services'' should ``receive clear and complete information regarding 
rates, terms and conditions for services.'' In July, NARUC's Committee 
on Consumer Affairs convened a panel on prepaid cards at our Summer 
Meetings in Portland, Oregon, which I moderated. The panel, which 
focused on existing State initiatives, was widely attended. You can 
expect that NARUC and its members will continue to be active on these 
issues. Shortly before that panel discussion, NARUC did an expedited 
informal survey finding that 18 of 30 responding NARUC member 
commissions handle complaints about calling card services. State 
oversight and interest in this industry segment comes at multiple 
levels.
    Several entities are involved in providing these services. 
Telephone companies are responsible for the telephone lines that carry 
calls. Resellers buy telephone minutes from the telephone companies and 
``resell'' them to end-users. Issuers set the card rates and provide 
toll-free customer service and access numbers. Finally, there are the 
distributors and retailers. Companies that fall into one or more of the 
first three categories frequently require certification from many of 
NARUC's member commissions. But even where a State commission lacks 
authority, they frequently attempt to resolve complaints informally or 
cooperate with other State agencies, e.g., the State Attorneys General, 
on enforcement efforts.
Fraud and Abuse in the Prepaid Calling Card Market
    Many Americans rely on prepaid calling cards to complete 
intrastate, interstate, and international calls. Analysts believe the 
main victims of abuse in this market are minorities, immigrants, the 
elderly, low-income consumers, members of our Armed Services, and 
others either not inclined or not able to adopt other communications 
options. It is widely acknowledged that fraud and abuse in this market 
is more prevalent than complaint data indicates.
    My colleagues on the NARUC Consumer Affairs Committee report 
several issues with calling card providers, including: (1) the provider 
is either not required to seek Commission registration or certification 
or they have chosen to ignore that requirement; (2) the calling time 
provided is substantially lower than advertised; (3) the provider 
engages in misleading and false advertising by overstating achievable 
calling time or understating unit cost/rate; (4) the advertised rates 
expire after short ``promotional period''; (5) the provider charges 
substantial undisclosed surcharges and fees; and (6) the card expires 
within a short period following the completion of the initial call.
    Prepaid calling cards present the usual enforcement challenges for 
State authorities. As mentioned earlier, frequently providers are 
headquartered in another jurisdiction and fail to register or seek 
certification from a State commission (in states that require such 
certification) or even register an agent for service of process under 
so-called State long-arm statutes. Moreover, most often, even in states 
where certification is required, the most easily located entity in the 
marketing chain--the retail store--is not subject to State Commission 
oversight.
    New York's Public Service law provides consumer protections which 
have allowed my Commission to help assist customers with calling card 
complaints. Some of those complaints are related to completion fees 
that deplete the card faster than the consumer could have realized. 
Another common complaint we receive is from consumers who have a 
defective card that does not allow him or her to complete any calls, 
and want reimbursement from the card provider, or who are trying to 
contact the service provider for general customer service issues. 
Consumers also frequently complain of call completion fees they did not 
discover until using the card. Both New York's law and S. 2998 require 
some information to be printed on the calling card, information on the 
rates and fees. This is a logical step; if this information is more 
readily available, it can stem the tide of customer dissatisfactions 
caused by inadequate disclosures. But there is a problem. Some 
disclosures now are often printed on the packaging material--material 
which is discarded almost immediately by the consumer.
    Although NARUC has no specific position on this problem, I do have 
some suggestions. In lieu of printing information related to rates and 
fees on the card packaging, I would like to suggest two options. Under 
the first, the service provider is required to include all rates and 
fees on a piece of card stock included with the calling card when sold. 
This card would the same size as the calling card and would have the 
phrase ``CONSUMER: DO NOT DISCARD'' printed on both sides in 14pt, 
boldface type. Another option, less useful to those without Internet 
access and is referenced in Section 3(a) of the bill, is to require the 
service provider to print a web address on the calling card which the 
consumer could access to confirm the rates and terms preprinted on the 
typically discarded packaging. Even if a consumer does not have access 
to the Internet or is not Internet savvy, the consumer could provide 
the consumer complaint call center with the website which would aid the 
investigation and resolution of a complaint by relevant authorities.
State Enforcement of Federal Rules Proposed in S. 2998
    The Prepaid Calling Card Consumer Protection Act of 2008 protects 
consumers by requiring the accurate and reasonable disclosure of the 
terms and conditions of prepaid telephone calling cards and services. 
As previously stated, NARUC has not formally taken a position on what 
Federal standards should be, but we have urged--albeit in other 
contexts--that consumers should receive meaningful disclosures about 
such services, and that states must be able to enforce any Federal 
standards using existing procedures and penalties.
    There are many circumstances that explain why a consumer may not 
report a complaint. They may not know who to call or where to file a 
complaint. The value of the card may not justify the hassle of trying 
to get a refund or assistance. Also language skills and cultural 
barriers, particularly for recent immigrants, can make it difficult for 
some consumers to file complaints. There needs to be a proactive 
outreach effort to ensure consumers know that there are rules that 
protect them and how to seek assistance.
    Many NARUC member commissions actively address calling card abuses. 
Several States, including Texas, California, and my home State of New 
York have laws specifying required disclosures, including notice 
requirements at the point of sale, verbal disclosures at the beginning 
of calls, and a required warning 1 minute before a card is depleted. As 
in most consumer service matters, a small number of bad actors create 
the bulk of the consumer complaints. What troubles me is the negative 
impact those bad actors can have on the industry which is also 
comprised of many service providers that deliver quality service at 
reasonable prices. The reputable providers make up the heart of the 
industry and should embrace the rules proposed in S. 2998.
    The fraud and inadequate disclosure problems which are the focus of 
this bill cannot be handled by market forces. The partnership 
established in Sections Six and Eight of S. 2998 recognizes that, under 
State procedures, consumer concerns can be addressed promptly, often 
through informal processes. Also, Section Eight effectively 
incorporates NARUC's general positions that (a) Federal rules should be 
``[a] floor, not a ceiling,'' as ``. . . blanket preemption on consumer 
affairs will restrict consumer redress in the future,'' and (b) that 
``. . . consumers should not have to wait for Federal rulemaking every 
time a new issue arises.''
    S. 2998 recognizes that, even in those instances when minimum 
Federal consumer protection standards are appropriate, states must be 
allowed to enforce those standards and to adopt more specific standards 
where needed. This bill also provides states with flexibility in the 
method of enforcement. Section Six of the bill empowers a State AG, PUC 
or other authorized State consumer protection agency to bring civil 
action against a carrier that violates its provisions. This is wholly 
appropriate.
    States vary on their method of enforcement. In some states consumer 
complaints may go to the Attorney General, in others complaints go to 
the PUC or another agency. The Federal Government should not dictate 
the agency or procedure for State enforcement. Such Federal dictates 
would require states to waste taxpayer dollars to shift resources to 
different agencies. In addition, such a change could only cause 
consumer confusion by changing the current contact State agency.
    From an enforcement standpoint S. 2998 is a clear win for consumers 
because it not only establishes clear national standards, but it also 
couples those standards with coextensive Federal and State enforcement. 
NARUC does suggest one minor addition to Section 6(c)(5) to make clear 
that states can use existing administrative penalties as well as 
procedures to ``enforce the provisions of the law of such state.'' \1\ 
With this very minor change, the bill clearly ensures multiple ``cops 
on the beat'' protecting consumers from bad actors.
---------------------------------------------------------------------------
    \1\ Specifically, Section 6(c)(5) should be revised to read: ``to 
establish or utilize existing administrative procedures or penalties to 
enforce the provisions of the law of such state.''
---------------------------------------------------------------------------
Conclusion
    NARUC supports the jurisdictional balance struck in The Prepaid 
Calling Card Consumer Protection Act of 2008. As drafted, the bill 
provides consumers with increased national disclosure requirements and 
ensures strong enforcement of national standards by allowing states to 
enforce those standards. It also efficiently preserves existing State 
options for consumer relief.
    Thanks again for the opportunity to testify. I look forward to your 
questions.
                               Appendix A
                 Statement by Chairman Barry Smitherman
                         Public Utility Commission of Texas
                                                      July 30, 2008
Executive Summary
    On May 23, 2008, the Texas Attorney General filed the state's first 
enforcement action against a prepaid calling card company, Next-G 
Communications, Inc. The investigation which led to the enforcement 
action was done in conjunction with the Public Utility Commission of 
Texas, and determined that Next-G's calling cards consistently 
delivered only 40 percent of the minutes on international calls claimed 
in the advertising for the cards.
    The results of the investigation show that Next-G inadequately 
disclosed the fees and charges associated with each call, reducing the 
number of minutes available for calling. The Texas Attorney General 
filed the enforcement action under the Texas Deceptive Trade Practices-
Consumer Protection Act.
History
    Beginning in 2004, staff from the Consumer Protection Division of 
the Public Utility Commission of Texas investigated whether calling 
card companies were following the advertising and disclosure 
requirements under the Public Utility Commission Substantive Rule 
26.34. The initial investigation revealed that calling card companies 
were not following the Commission rule related to accurate disclosure 
of rates and charges on the card or at the point of sale. The 
Commission rule also requires that enforcement actions for fraudulent, 
unfair, misleading, deceptive, or anticompetitive business practices 
will be coordinated with the Texas Attorney General in order to ensure 
consistent treatment of specific alleged violations. Customer 
Protection notified the Texas AG's Office of the issues relating to the 
accurate disclosure of information to customers, and during the summer 
and fall of 2007, worked with the Texas Attorney General's Office to 
test the calling cards from Next-G Communications to determine the 
number of minutes that the cards provided.
    During the investigation on the Next-G calling cards, Customer 
Protection staff made calls to numbers in Honduras and El Salvador 
using $5 and $10 calling cards purchased in San Antonio, which are 
typical of the calling cards purchased at convenience and grocery 
stores. Consumer Protection Staff made several different types of calls 
using different calling cards: ``straight line'' calls to the target 
phone numbers, where a call is made until it is terminated by the 
provider, five-minute calls, and 10-minute calls. When calls were made 
using the calling cards, a voice prompt is given at the beginning of 
each call stating the number of minutes available for each call. The 
minutes stated in the voice prompt were compared to that actual number 
of minutes received or to the minutes stated in a subsequent call using 
the same card.
    The results of the investigation showed that callers often received 
less than half of the minutes advertised. For example, when calls were 
made to Honduras using the $5 calling cards, the voice prompt indicated 
that there was 35 minutes of calling time. Callers received only 12 
minutes for these calls. With calls to El Salvador using the $5 cards, 
the first five-minute call would use up 18 minutes of calling time, and 
the first 10-minute call would use 25 minutes of calling time, as 
indicated by comparing the minutes stated on the voice prompt in 
subsequent calls.
    Based on the results of the investigation, the Texas Attorney 
General filed a lawsuit asserting that Next-G engaged in false, 
deceptive and misleading acts and practices, specifically, not 
providing the minutes offered in the advertisements or voice prompt at 
the beginning of phone calls, and using advertising with vague, 
misleading, and confusing disclosures about fees and charges. The 
Attorney General requested that the defendant disgorge all money 
fraudulently taken from individuals and businesses, and requested a 
temporary and permanent injunction against Next-G selling cards that do 
not give all the minutes advertised or indicated in the voice prompt. 
The lawsuit is currently proceeding in State District Court in San 
Antonio.
Conclusion
    Based on the investigation of the Next-G calling cards, it is 
obvious that some calling card companies mislead and confuse customers 
by including vague disclosures on charges and rates that dramatically 
alter the number of minutes available to a customer. Customers that use 
calling cards, especially for international calls, are generally 
immigrant or low income individuals attempting to contact families or 
friends. Calling card companies should be required to accurately 
disclose the fees and charges, rather than use incomplete and 
misleading language. By putting these precise terms up front, customers 
will be aware of what they are paying for, and can make better 
decisions in choosing their telecommunications needs.
                               Appendix B


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Senator Nelson. Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman, and thank you for 
doing this.
    If I may, I would like to direct my first question to Ms. 
Greenberg, and that is, out there in the marketplace, out in 
the field right now, if someone has a problem with a calling 
card, what do they do right now?
    Ms. Greenberg. Well, as has been mentioned, there are State 
regulators. I think I would probably call my state. I would 
tell consumers, as we do, to call their state Attorney 
General's Office or whoever runs their consumer protection 
division in the State. I would recommend they report a loss of 
minutes and money spent on these cards to the FTC as well. We 
know the FTC has been involved. And people do call us about the 
cards and complain.
    I myself use the cards because I have friends. You know, I 
lived abroad for a period of time and I have friends who are 
abroad. And what I noticed is, when I lived abroad, the calling 
cards there actually deliver the minutes that are promised. 
Here the series of cards you buy at the five-and-dime typically 
are shockingly quick to subtract your minutes.
    So I think that there are places that you can call.
    I think there are very good possibilities for enforcement. 
I do think that the low barriers to entry do militate for a 
kind of bonding system that we need to have and some State 
legislation calls for that kind of thing.
    Senator Pryor. If someone does complain, say, for example, 
to their state Attorney General, or whoever does their consumer 
work--I think in Florida it is actually the Department of 
Agriculture--what remedy is available? Does he get his money 
back, or what does he get usually?
    Ms. Greenberg. Well, I think the satisfaction comes in 
complaining because the likelihood that you are going to get 
your money back on a $2 card from state regulators at this 
point really has not proven very fruitful.
    There are also class action lawsuits brought by attorneys. 
That is one way to try to distribute some money. But the money 
is going to be pretty negligible. So consumers are really left 
holding the bag.
    Senator Pryor. Have there been class action lawsuits on 
these cards?
    Ms. Greenberg. Yes. My understanding is there have been a 
couple of class action lawsuits on prepaid calling cards.
    Senator Pryor. Commissioner Acampora?
    Ms. Acampora. Yes.
    Senator Pryor. How many complaints do you all receive in 
New York? Do you track those? I mean, how is that working 
there?
    Ms. Acampora. Well, the complaints that do come in to our 
office we can track. We have an Office Of Consumer Services. 
But in the State of New York, they could be calling the 
Attorney General's Office on their own also. They could be 
calling the Consumer Protection Board. If they are in New York 
City, they could be using the consumer services in New York 
City. So it would be kind of hard to track all the various 
entities that consumers could use.
    However, when you are dealing with a population that are 
immigrants and some do not speak English, I think most of the 
time people do not complain. They just suck it up and they lose 
the cost of the card. So it would be hard to estimate how many 
do not even call.
    Senator Pryor. Right. I am sure that is the case. Given the 
dollar amounts involved here, I think a lot of people probably 
simply do not call.
    And let me ask all the panelists, if I may, your thoughts 
on whether you believe the Federal Trade Commission is doing 
enough and if you think Congressional action is necessary. Do 
you want to go ahead, Ms. Greenberg?
    Ms. Greenberg. Yes. We are certainly supportive of your 
bill, Senator Nelson, and Congressman Engel's bill as well. I 
think disclosure is critical, and it will be certainly helpful 
in at least, I think, diminishing somewhat the bad actors.
    You know, I would go a few steps further in terms of--I 
have already talked about I think a bond should be put up. I 
also think there is an unconscionability factor here in the 
rates because, as we saw with your fantastic posters here, 
there is disclosure. It may be fine print, but there is 
disclosure. It is not always honest in terms of what you get. 
But Black's Law Dictionary defines unconscionability as, 
``unconscionability is generally regarded to include an absence 
of meaningful choice on the part of one of the parties to a 
contract, together with contract terms which are unreasonably 
favorable to the other party.'' Boy, is this an example of 
that.
    So I guess I would push for something a little stronger. I 
have talked about that in my written testimony.
    And also, you know, the ability to compare rates. That is a 
critical tool that consumers use. But these card sellers, the 
vendors, come in and out of the market. It is very hard. You 
know, you can go 1 week to your local store and buy one of 
these, and then the next week, this card is not there anymore. 
So we do not know who is behind these cards. I do not have a 
good feeling about the reputation of many of these companies. 
But I think we really have to get tough with them and start to 
learn who they are and allow consumers to compare rates between 
cards so then they can pick and choose and use the marketplace 
to make their choices.
    Senator Pryor. Mr. West, do you feel like we need 
legislation?
    Mr. West. Yes, sir. We at The Hispanic Institute probably 
believe that the FTC has not done enough, and we do need 
legislation, sir.
    Senator Pryor. Commissioner?
    Ms. Acampora. Yes, I definitely think so. Your legislation 
is great. In fact, it has made us in New York look at what we 
already have, and I think we need to strengthen that.
    But the legislation is--definitely you need the 
legislation. As a former legislator, I can tell you that.
    Senator Pryor. Ms. O'Brien?
    Ms. O'Brien. Yes, sir. With regard to the portion of the 
market that I will call the bottom-feeding portion of the 
market, I think that you do need legislation. I would suggest 
strongly to you that you make clear who has the 
responsibilities for enforcement. Do not put a little piece 
over here and a little piece over there because I think 
ultimately that will water everything down.
    My own experience, particularly in military, is that 
frequently, to sort of harken back to your previous question a 
little bit, when people had an issue and they called the 
customer service line, the company was always very good about 
trying to resolve it. And frequently we found that a lot of 
their complaints were, frankly, pure misunderstanding on their 
part, with regard to how the system worked or what they were 
actually getting. They were very quick to jump the gun and 
believe that there was an issue with our company ripping off 
service members; but that was clearly not the case, once we 
were able to explain it to them. If there was at any point an 
irreconciliable beef, and they felt uncomfortable about it, we 
would either refund their money or give them an additional card 
if that satisfied them.
    I think those kinds of issues are always going to be 
around. I do not think that legislation should in some way, 
shape, or form hinder the companies that are doing a good job, 
but for the bottom feeders, yes, I think legislation is 
necessary. But again, clear oversight as to who is responsible 
for enforcement.
    Senator Pryor. Thank you.
    Mr. Chairman, thank you again for holding the hearing but 
also for your work on this issue because there really is some 
bad activity going on out there that we need to address. Thank 
you for your leadership on this issue.
    Senator Nelson. Thank you.
    Senator Thune?

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Mr. Chairman, and I too want to 
thank you for holding the hearing today. And I appreciate all 
the witnesses making time to come up and testify. Although I 
missed the earlier panel, I know that Representative Engel in 
the House has a bill, has a great interest in this issue.
    Calling cards are particularly important, I think, for 
recent immigrants and low income consumers who may not have 
access to other telecommunication services and, at the same 
time, may not have a lot of knowledge of the consumer 
protection laws, our language in some cases, how to register 
complaints against providers when those laws are violated. And 
because of this, I believe that violations of consumer 
protection laws in the prepaid calling card market are 
particularly egregious, and I am pleased to see that the FTC 
has recently undertaken actions to enforce those laws.
    And I look forward to supporting proposals that ensure that 
consumers have the opportunity to acquire the necessary, 
relevant information when purchasing prepaid calling cards.
    And I want to thank the witnesses for their testimony and 
their effort to protect our Nation's consumers.
    And I want to just follow up and maybe drill down a little 
bit from what Senator Pryor asked with regard to legislation.
    First off, I guess I am interested in whether you have seen 
any improvements in the prepaid calling card market after the 
FTC's recent actions.
    Mr. West. We have done testing over the last couple months 
and we really have not seen any improvement in what is being 
promised and what is being delivered at this point. So we have 
no evidence of any improvement even though there is stuff going 
on with Attorneys General around the country, State 
legislatures, and this legislation being introduced. We have no 
scientific data to support that.
    Senator Thune. You talked about perhaps Congress acting in 
this regard. Is that a preferred approach to having states 
enact some sort of legislative framework and accountability at 
that level as opposed to having Federal legislation and 
oversight and a framework for addressing this? I mean, you said 
many of the states are acting----
    Mr. West. Well, like what has happened in Florida where 
they have settled with some companies, the problem is they have 
only settled with 10 companies there. There are many other 
companies doing business there. And then that legislation and 
those efforts are restricted to Florida only. So you have the 
other 49 states still going about their business. So I think 
that while we welcome what is happening in the individual 
states, it would be a piecemeal effort.
    Senator Thune. How many states have taken steps in the form 
of a legislative solution?
    Mr. West. Somebody here on the panel may have more 
information on it than I do.
    We know that New Jersey has taken action in the 
legislature. We think the Attorney General Brown in California, 
Attorney General Cuomo are looking at this now. I know the 
District of Columbia is looking at legislation now. So we have 
been in contact with the Attorney General in Illinois also. So 
there is a lot of activity. We have recently been contacted by 
the City of San Francisco. So now it seems like some cities are 
getting involved also.
    Ms. Greenberg. If I can jump in. I think our preference 
from a consumer standpoint, consumer advocacy standpoint, is to 
have the Federal legislation require some sort of baseline 
disclosure, as S. 2998 does, and then allow the states to focus 
on companies that may actually be located there.
    One other suggestion I had is that perhaps the industry 
needs to set some voluntary standards, which members of the 
industry can agree to. We talk about bottom feeders and we 
could maybe cast away some of the worst actors and get the 
industry to----
    Senator Thune. Is there any of that kind of self-policing 
going on today? I mean, does the industry have any sort of 
baseline voluntary requirements----
    Ms. Greenberg. I have not seen any evidence of that, but 
maybe others on the panel know.
    Mr. West. I think, Senator, there was one company that ran 
into some trouble, and now they are trying to get everybody 
else onboard to deliver what they are promising. But I do not 
think that they did it out of altruistic reasons or anything 
like that. So I do not see it happening.
    Ms. Acampora. Senator, to your question about how many 
states are active. NARUC undertook a quick survey of its 
members on this issue; and of 30 respondents, the PUCs in 18 
states had rules and handled consumer complaints regarding 
prepaid calling cards. Eighteen states have legislation.
    Senator Thune. OK. And do the states who have enacted 
legislation--are they similar in terms of--is everybody taking 
a different approach to this? Is there any agreement, I guess, 
on kind of what a formula would be to----
    Ms. Acampora. I think that is really why the Federal 
legislation would be very helpful, and just going through the 
legislation, as I said previously, what we have set up in New 
York definitely could be strengthened by some of the ideas and 
some of the mechanics set forth in this legislation.
    Senator Thune. Is it the consensus pretty much of everybody 
on the panel that we do need some sort of Federal legislative 
action on this? Is that fair to say?
    Ms. Acampora. I think so.
    Ms. Greenberg. From our perspective, yes. Like a baseline, 
a set of sort of minimum standards for disclosure and other 
issues the bill addresses I think would be very helpful.
    Ms. O'Brien. If I may, I would also like to add I think 
some consumer education would be extremely helpful to many 
people. If we make them smarter, they will not make the mistake 
of buying a bottom feeder's card is what it comes down to. And 
I am sure there has been a lot of that, but speaking for 
someone who had responsibility for the military for 8 years, we 
spent millions of dollars educating military consumers.
    And to your question regarding self-policing, we had a 
standard within the company not to produce any form of card for 
the military consumer that could in any way, shape, or form be 
conceived or construed as deceptive. But nonetheless, when the 
Iraq War broke out, I had literally thousands of complaints 
that were borne out of, frankly, just plain ignorance of how 
prepaid cards work, why the rates are different from card to 
card, why a card purchased at the U.S. Post Office was 
different than a card purchased at Sam's Club or Wal-Mart or 
anywhere else.
    So while enforcement is important, I think that we just 
cannot dismiss this as a bowl of Jello that is easily 
understood. It takes a little understanding. And for that 
reason, I would strongly recommend consumer education wherever 
we can.
    Ms. Acampora. Could I just piggyback on that? We 
recommended in our testimony that the packaging be changed 
because most people take the packaging, rip it up. I am not an 
expert on how you manufacture, but maybe providers could double 
the size of the card but allow it to be folded in half which 
would make it a little bit thicker. But currently holding onto 
that packaging is really key because that is what gives a lot 
of the information we in N.Y. need for enforcement to 
investigate. And certainly if they were buying it also through 
a website, there needs to be information on that website too, 
which would be helpful.
    Senator Thune. Very good. Thank you, Mr. Chairman.
    Thank you all.
    Senator Nelson. I want to go back to something that one of 
you said about the distribution of the cards through merchants. 
What do we do there? And as distribution technology changes and 
then eventually you are going to have virtual cards available 
on the Internet, it is going to make enforcement harder. Ms. 
O'Brien, what do you think about all this?
    Ms. O'Brien. You have virtual cards now. AT&T makes a 
virtual card available, prepaid cards available, to the 
military community through the military exchanges. You need 
only go to their website and plunk down your form of payment, 
whatever that might be, a credit card, military STAR card, and 
as a result, you will get e-mailed back to you the virtual PIN 
number that you need to make a call, along with all the terms 
and conditions that apply to that particular card.
    Yes, it will complicate enforcement, to be sure. Again, I 
would come back to the notion of education as being something 
to help overcome some of the issues.
    Senator Nelson. Does anybody else want to comment on that?
    Ms. Acampora. Thank you. I think again that you should 
include in the e-mail the terms and conditions to the customers 
if they purchased it online. But I think your bill does strike 
a very good balance, and you have specified disclosures for 
online services. And giving the FTC rulemaking authority with 
sufficient flexibility to address some new attempts to bypass 
some of those protections--I think you have to kind of work on 
that.
    Senator Nelson. As we were talking and we had those 
examples up here of fine print and information that you really 
cannot read, we need to provide more information for the 
consumer to beware. But what is the practical way to obtain 
this?
    Now, the language barrier is clearly a problem that we have 
already unveiled here. But rates and conditions are not printed 
on the card packaging. So some of you have suggested in your 
testimony either attaching a rate card to the calling card or 
listing a website address or a toll-free number. Talk about 
this.
    Ms. O'Brien. Sir, I could tell you that AT&T cards 
frequently had, depending on the nature of the card and the 
size of the card and how it was going to be sold, and in order 
to make full disclosure, a separate leaflet inserted that had 
virtually all the terms and conditions on it. And I can tell 
you if you walked onto any military base, after service members 
bought those cards, what you would see are those leaflets all 
over the bottom of the phone booths. People just would not read 
them. And so that was when we really determined that we needed 
to educate people as to how to use them and how to be smart 
consumers when buying them.
    I don't know how you get around that need for education 
issue with the vast majority of Americans. Still today grandpa 
buys a card for his grandson in Iraq, and it does not go the 
way he expected. And he bought it from the U.S. Post Office 
when he picked up his stamps, and he is angry about it. It is 
an issue. It is an issue honestly I am not quite sure you could 
address.
    More information, of course, is always better, but it has 
to be information that is willing to be consumed. It cannot 
just be a 5-pound pile of something; it needs to be better than 
mice type that people are just going to throw on the floor.
    Mr. West. Senator?
    Senator Nelson. Mr. West?
    Mr. West. One of the things when you buy one of these--we 
were talking earlier about the class action suit, and the thing 
is you throw the card away. So there is no way of really 
reclaiming the money that you have lost. And I think that the 
Internet activity will--you know, if there are virtual cards 
and so forth, it will be easier to track your loss of money and 
compensate people who have been fraudulently dealt with.
    But one of the issues is that these companies will--you 
know, if a consumer is educated, he will spend 3 months using a 
card and getting all the minutes that they want. And what the 
company will do is suddenly pull the rug out from under them 
and in the fourth month try to recoup a lot of the profits--you 
know, increase that profit margin. So if he thought he was 
buying a good card for 2 months, in the third, fourth month, he 
is not buying a good card.
    Senator Nelson. Ms. Greenberg, in your testimony you say 
that the FTC ought to appoint a monitor to oversee the 
industry. How should that work?
    Ms. Greenberg. What we suggested is let us look at how well 
disclosure works. Your bill sets out some very good and strong 
requirements for disclosure. Give it a year. Let us have the 
FTC oversee how the industry is, if it is improving.
    You know, I am concerned about the cards that you go in and 
get at the--I get them at the gas station. This is a $6 billion 
industry. These cards do not deliver what they say they are 
going to deliver. The fine print tells you that you are being 
ripped off. You read it. You read it out loud. It is a $2 card 
and 99 cents comes off the card each time you make a call. You 
do not have any money on this card. So we have really got to 
get a handle on how we are going to rein in what I think is 
really a colossal rip-off for so many consumers.
    So what we are recommending is that the FTC come back, take 
a look and see how the disclosure has worked. I think 
disclosure will have a positive impact. Whether it will rein in 
sort of a level of fraud and scamming that is going on, 
particularly of folks who do not speak English, who have 
relatives overseas, who are not going to take any action, not 
going to take any corrective action--they are generally not 
going to be part of a class action lawsuit. They are probably 
not going to report this to the FTC. These are the people that 
I am most concerned about protecting, and I think the FTC could 
come back in, take a look at where we are in a year, and see 
whether these practices have been reined in.
    Senator Nelson. A couple years ago when I got involved in 
preventing the fleecing of military members on payday loans 
with exorbitant interest that was being charged to service 
members--and we were able to pass that legislation--I heard all 
the way up to the Chairman of the Joint Chiefs of Staff about 
how military members were being hurt.
    Now, I have not heard that commentary, which does not mean 
that it is not there. And I am curious, Ms. O'Brien. Do you 
think the Pentagon is aware of this particular fleecing that is 
going on of the military community?
    Ms. O'Brien. Yes, sir. I think that they are. I think the 
order of magnitude of the problem in the military specifically 
may not be as large as you might think it is. Generally 
speaking, most cards that military people buy and use 
personally are purchased at their exchanges. The exchanges do a 
very good job of educating their own consumers about the cards 
that they buy, why they are better than the cards they would 
buy on the outside, and in point of fact, why in the countries 
where military people use cards the most, they are the best 
cards you can get, bar none.
    I would also add to that, though, that cards that come as 
gifts, of course, there will be some complaints about those 
cards because frequently those cards were never designed to be 
used in the military.
    Third, I would add that the military is a very tight 
fraternity, and so 1st Sergeants are very, very scrupulous 
about making sure that their charges know exactly how to use 
cards, exactly what retailers to stay away from, exactly where 
they should be doing their purchasing of cards. But that is not 
to say that family members of military people are not affected 
by this problem because clearly they are. But generally 
speaking, the military itself----
    Senator Nelson. You gave the example of a grandpa who wants 
to buy a card for his grandson who is deployed to Iraq or 
Afghanistan.
    Ms. O'Brien. Yes. That was based on an actual experience 
where a veteran himself, a retired marine, had bought a card at 
his local post office for a grandson who was in Iraq, and he 
assumed that a card purchased at the post office would be a 
good card for that purpose. Of course, he was retired many 
years out of the service, not familiar with the current state-
of-the-art. And actually in his time, he was lucky if there 
were pay phones, much less cards. So even though he himself was 
former military, he did not have the level of education that 
most military people have today. And for that reason, he 
purchased a card that was not well suited for a call back to 
the United States from Iraq.
    Senator Nelson. Does anybody on the staff want to ask any 
more questions?
    OK. Well, this has been most enlightening. Thank you. We 
are going to proceed with this legislation. Thank you.
    And the meeting is adjourned.
    [Whereupon, at 11:19 a.m., the hearing was adjourned.]
                            A P P E N D I X

              Loyola Consumer Law Review, Vol. 19:1--2006

     Deceptive Claims for Prepaid Telephone Cards and the Need for 
                               Regulation

Mark E. Budnitz *, Martina Rojo 1, Julia 
                          Marlowe =

I. Introduction
    The United States prepaid phone card industry is a multi-billion 
dollar industry. In 2002, prepaid long distance cards alone generated 
$3.6 billion and the industry is estimated to grow significantly.\1\ 
Growth in the market for prepaid phone cards is expected to continue, 
in part because sales are linked to the increasing use of cellular 
phones.\2\ Already the bulk of convenience stores' general merchandise 
sales are for prepaid phone cards.\3\ In fact, one industry source 
reports that phone cards are the highest profit center in Walgreens 
stores after prescriptions.\4\
    The cards are often promoted to niche markets consisting of college 
students, immigrants and certain businesses.\5\ According to Barry 
Catmar, Vice President of Operations for Digitac, ``the large number of 
immigrants who call friends and relatives abroad is a perfect market 
for phone cards.'' \6\ The increase in the immigrant population in the 
United States, especially Latino consumers, has led to the marketing of 
some cards specifically to the Spanish-speaking consumer.\7\ As a 
result, the market for prepaid telephone cards is segmented and some 
groups of consumers are particularly vulnerable.\8\ There is evidence 
that consumers in the United States who use cards to call Spanish-
speaking countries face much higher prices than expected due to hidden 
fees and confusing, contradictory and inaccurate information.\9\
    In most states, there is little or no regulation of prepaid 
telephone cards. Thus most states do not require phone card companies 
to disclose essential information and substantive rights that ensure 
consumers receive satisfactory service. Consequently, information 
provided on the cards and by customer service representatives is often 
misleading or unavailable.\10\
    Consumers have few rights, and even where consumers do have rights 
that are violated, it is often difficult for them to obtain a remedy. 
Additionally, because each card has a small monetary value, litigation 
is not always a viable option, especially if contracts include 
arbitration clauses and prohibit class actions.\11\ For example, low-
income consumers are likely to purchase cards that sell for less than 
$10, rendering the apparent cost of using prepaid phone cards 
insignificant. Because of their low income, however, the cumulative 
cost may be significant.\12\ Furthermore, many immigrants have no 
alternative if they need the cards in order to communicate by phone 
with their families in another country.
    Given these conditions, the Federal and the state governments 
should consider passing legislation to regulate phone cards. On the 
Federal level, both the Federal Trade Commission (FTC) and the Federal 
Communications Commission (FCC) have done little to address the 
problems other than minimal enforcement of current inadequate 
regulations. The FTC has addressed few instances of deceptive 
advertising,\13\ and the FCC currently enforces the limited area of 
federally required fees on prepaid phone cards.\14\ On the state level, 
consumer protection varies greatly. Legislation is warranted unless (1) 
the market works and consumers acting reasonably are able to make 
efficient choices and protect themselves, (2) the loss to consumers is 
small and there are few reported consumer problems, and (3) market 
conditions are such that the industry can be counted upon to engage in 
effective self-regulation.
    This article explores the need for legislation by reviewing a 
combination of approaches, including an economic analysis of the market 
for prepaid phone cards, findings from an empirical study of Hispanic 
phone card usage in calling Spanish-speaking countries, and the current 
law on this issue. The results of this investigation demonstrate a need 
for national regulation. We recommend that Congress enact a statute 
which mandates a minimum standard of protection and authorizes the FTC 
to issue regulations. Such a Federal statute would also contain 
disclosures, substantive protections, and consumer remedies. 
Additionally, states should be permitted to enact requirements that 
provide more protection as long as they are not inconsistent with the 
Federal law. If Congress decides not to pass a Federal statute, state 
legislatures can easily adopt the features of our Model Prepaid 
Telephone Card Act.
II. Is Regulation Necessary? The Lessons from Economic Theory
    Regulation is not necessary if consumers act reasonably and make 
efficient choices in the marketplace. Consumers can only make efficient 
choices if they are able to obtain the complete and accurate 
information needed prior to purchase without incurring excessive 
transaction costs. Such information may be contained in advertisements, 
in brochures accompanying the sale of the cards, on the packaging, or 
on the cards themselves. Another source of information is experience. 
Experience may come from the consumer's prior use of cards or from 
others, such as family and friends, who have used the cards. For the 
consumer to obtain enough information through experience, significant 
information search costs may arise, thereby raising the price of the 
product much like transaction costs. A consumer would incur significant 
search costs if he repeatedly paid for transportation to a store and 
spent money on a card that did not provide many minutes (though the 
advertising might state otherwise). Each time he must try a different 
card brand in order to find one that is cost-effective. However, he may 
be forced to try several cards before discovering a good card. Even 
then significant search costs continue if rates on the good card have 
changed.\15\
    Theoretically, prepaid telephone cards come close to fitting the 
perfect competition model. Prepaid telephone cards are a homogenous 
product (consumers buy minutes), and there are many buyers and sellers 
due to the ease of entry into and exit from the market.\16\ However, in 
the perfect competition model, consumers have perfect information. 
Perfect information is rarely present, but consumers can typically 
search for information and make informed purchase decisions for many 
products.
    The prepaid telephone card market is one where information could be 
made available to allow consumers to make better informed purchase 
decisions. Yet, investigations of the market indicate that either 
consumers cannot obtain information, or the information is inaccurate, 
contradictory or deceptive.\17\ Moreover, information is often not 
available from customer service, and consumers also may be misled by 
seller misconduct such as card issuers who sell defective cards.\18\ 
Consumers retain information from past purchase experience, but 
information from previous experience is likely to become outdated over 
time as terms and conditions of the cards change.
III. Problems Encountered by Consumers and Information Needed: 
        Findings from an Empirical Study
    Even if information is not available prior to purchase and customer 
service is inadequate, regulation may be unnecessary if prepaid 
telephone cards are inexpensive. In that situation consumers are able 
to learn what they need to know in order to avoid problems without 
incurring high costs. However, while each card is inexpensive, the unit 
price, or cost per minute, may be significant and consumers who rely on 
prepaid phone cards for many of their calls end up paying an excessive 
amount for telephone service. The prepaid phone card market has grown 
into a multi-billion dollar industry, and the cost to consumers as a 
group is tremendous, especially for certain segments of the population.
    A qualitative study of forty-five Latino immigrants' experiences in 
an urban market in Georgia found that 78.7 percent of the immigrants 
complained about prepaid telephone cards.\19\ More specifically, 
consumers complained that they did not receive the number of minutes 
they expected and that customer service personnel could not be reached 
during available hours and often could not answer consumers' questions 
even when reached.\20\ A follow-up study was conducted to verify these 
complaints.\21\ The follow-up study investigated the true costs of the 
cards and the information available from customer service.\22\ Minutes 
are often deducted for hidden fees, and consequently, consumers do not 
receive the number of minutes they are told are available. True cost is 
calculated by determining cost per minute using an accurate amount of 
minutes received.\23\ In the study, over 250 prepaid telephone cards 
costing under eleven dollars were purchased and then used by bilingual 
data collectors to call Spanish-speaking countries from January until 
May 2004.\24\
    Before placing the calls, each data collector called the customer 
service number and asked a series of questions from a survey designed 
by the researchers.\25\ Customer service personnel were asked about (1) 
the number of minutes the customer would have to call a specific city, 
(2) various kinds of fees that might be charged, (3) minute rounding, 
and (4) hours of customer service availability.\26\ Data collectors 
then placed a call, using only one-half of the number of minutes that 
the recorded message indicated was on each card.\27\ This was done to 
ascertain if maintenance fees, hidden charges, or both were 
present.\28\ After at least 1 week, a second call was placed to the 
same city.\29\ The date and time were noted at the beginning and end of 
each call.\30\ The number of minutes available was also noted.\31\ Each 
card was used until all minutes had expired.\32\ Calls were made to 
cities in Mexico, Colombia, Argentina, Peru, Spain, Uruguay, Guatemala, 
and Nicaragua.\33\
    The researchers computed expected cost by dividing the cost of the 
card by the initial number of minutes the consumer was told he or she 
had.\34\ The actual cost of the card was computed by dividing the cost 
of the card by the actual number of minutes that a consumer obtained 
when using the card.\35\ Cost was therefore computed as a unit price: 
cost per minute.\36\ Findings from this research indicate that there is 
wide price dispersion with prepaid telephone cards.\37\ The average 
actual cost of the cards was 87 percent higher than the average 
expected cost.\38\
    Data collectors also made three attempts to reach a customer 
service representative.\39\ For two-thirds of the cards, it was 
possible to talk to a customer service representative.\40\ The customer 
service representative answered on the first attempt for about one-half 
of the cards. For one-third of the cards, the consumers were not able 
to talk to a customer service representative, either because they were 
on hold for more than 5 minutes, no one answered, or there was only a 
recording.\41\ Furthermore, talking with a customer service 
representative was often not helpful.\42\ Although some customer 
service representatives were helpful, many times the customer service 
representative was not able to answer questions such as whether minute 
usage was rounded up or what fees were charged.\43\
    Subsequently, the researchers conducted an additional investigation 
of the information available on the cards.\44\ One problem was that for 
some cards there was very little if any information about fees.\45\ 
Another problem was that no standardized wording existed.\46\ For 
example, in some instances a ``service'' fee appeared to be assessed 
per call much like a connection fee and in other instances what was 
called a ``service'' fee was assessed periodically in the same manner 
as a maintenance fee.\47\ Additionally, the wording of some information 
was vague, such as the use of the terms ``as may apply.'' \48\ Stating 
that a maintenance fee ``may apply'' provides a warning for the 
consumer but does not tell the consumer if there is a maintenance fee 
or not.\49\ Some maintenance periods are assessed after 2 days and 
others after 30 or 60 days.\50\ A more serious offense was the use of 
contradictory or misleading wording.\51\ Many cards state that there is 
no connection fee but the fine print states that ``connection fees may 
apply.'' \52\ Some brands of cards have no connection fee but they have 
a fee at the end of each call, called a ``post-call'' or ``hang-up'' 
fee.\53\ Other information is also unclear and perhaps deceptive, such 
as information about taxes, pay phone surcharges and warranties.\54\
    More accurate information should be given on the number of minutes 
available when one places a call. When a consumer places a call, he or 
she is told how many minutes are available. However, a consumer 
typically does not receive all of those minutes.\55\ Minutes are 
deducted for a variety of reasons such as connection costs and minute 
rounding penalties.\56\ Determining the true cost per minute is 
unnecessarily complex because the consumer does not know how many 
minutes are deducted, and for which fees they are deducted.\57\ The 
costs include activation fees, connection fees, minute rounding, extra 
pay phone fees, additional cell phone fees, charges even if no 
connection is made, maintenance fees, and service fees.\58\ It would be 
helpful if companies provided information on which fees were 
applicable, even if the consumer would not know precise amounts.
    Because of the great variation in the kinds of fees assessed, the 
difficulty in determining how the fees are assessed, and the lack of 
standardized wording, meaningful comparison shopping is impossible. 
Uniformity of information, disclosure and standardized names for fees 
would help consumers, much in the same way that nutritional labeling 
has provided a mechanism for uniform comparison. In some cases, 
outright consumer fraud may be present. Customer service 
representatives indicated that for some prepaid phone cards there were 
charges even if there was no connection. This is illegal in some 
states.\59\ However, it was not possible to know if the consumer was 
charged for a call that was not connected.
IV. The Likeliness of Self-Regulation: The Nature of the Prepaid Phone 
        Card Market
    The third question addressed is whether the prepaid phone card 
industry can be expected to regulate itself. Self-regulation is 
probable when there are industry-wide standards available, the industry 
standards adequately protect consumers, and the industry is dominated 
by strong stable companies that are committed to those standards and 
can pressure other companies to comply.
    Self-regulation is likely to occur if there are strict industry-
wide standards. The industry's trade association, the International 
Prepaid Communication Association (IPCA) has adopted standards for its 
members.\60\ One such standard requires that minute rounding be in 1 
minute intervals.\61\ The problem is that there is no enforcement of 
the industry guidelines and no reason to believe that they are being 
followed by the majority of prepaid telephone card providers. According 
to Howard Segermark, Executive Director of the IPCA, only about 80 
providers of the estimated 500 plus providers are members of the 
IPCA.\62\
    The IPCA standards are too limited to provide consumers with the 
protection that they need.\63\ Even if the standards were satisfactory 
they could not serve as an adequate substitute for legal protections. 
For example, it is doubtful that the IPCA could pressure non-members of 
the association into complying with the standards unless the industry 
was dominated by stable companies who supported the IPCA standards. The 
prepaid phone card industry involves many different types of businesses 
such as: carriers, resellers, distributors, card issuers, and 
retailers. Absent rules having the force of law, compliance with 
voluntary standards is highly doubtful. Even if current businesses 
agreed to comply, someone would have to assume the responsibility to 
persuade the constant stream of new entrants who are enticed to enter 
the industry because of low start-up costs, and the general lack of 
compulsory registration or bonding, to comply with the standards. 
Additionally, even if the standards were satisfactory, there is no 
guarantee that they would not be changed without any prior notice to or 
input from consumer representatives. At the very least, contracts 
between issuers and consumers should incorporate the IPCA standards so 
consumers can sue in court for breach of contract if the issuers do not 
follow the standards.
    Whether the industry can regulate itself hinges upon three factors: 
whether standards are available, whether they protect consumers, and 
whether the industry is dominated by strong stable companies. Although 
there are industry standards, they do not provide adequate protection 
for consumers because, as the empirical study indicates, the standards 
are not followed.\64\ For example, information on minute rounding was 
available for less than half of the cards.\65\ Of those for which 
information was available, slightly over half of the cards used more 
than 1 minute rounding.\66\ Furthermore, the industry is not dominated 
by strong stable companies.\67\ The fact that one can enter the market 
without incurring great costs means there are many providers. There is 
also evidence that the companies more likely to be considered stable, 
such as AT&T, MCI and Sprint actually cost more per minute than the 
other companies, and they do not give the consumer any better 
information than the lesser-known providers.\68\ Our conclusion is that 
the industry cannot be expected to regulate itself.
    Because of the problems consumers face in the marketplace and the 
dim prospects for adequate self-regulation, consumers need legal 
protection. The laws now on the books, however, fail to ensure that 
consumers receive the information, safeguards and remedies they 
require.
V. Adequacy of the Current Law
    A review of current law demonstrates it is not adequate. No Federal 
law governs prepaid phone cards except the Federal Trade Commission Act 
(FTC Act).\69\ It applies generally to all industries subject to FTC 
jurisdiction.\70\ The FTC Act simply prohibits deceptive and unfair 
acts or practices.\71\ It does not require any disclosures and is not 
tailored to the needs of consumers who purchase prepaid phone 
cards.\72\ Rather, the Act only protects consumers from the most 
egregious conduct.\73\ Because there is no private right of action, it 
protects only the customers of those companies against whom the FTC 
brings an action.
    Most states have no statutes or regulations covering prepaid phone 
cards. Among the states that do regulate the cards, there is a great 
deal of variation in coverage and regulation ranges from minimal to 
comprehensive. However, no state adequately protects consumers.\74\ 
Most states have laws prohibiting unfair and deceptive acts and 
practices in general.\75\ While the laws provide for a private right of 
action,\76\ many do not allow class actions,\77\ which are crucial for 
cases involving purchases of inexpensive items. Also, the state laws 
suffer from the same deficiencies as the FTC Act.
    Consumers may be able to attack the agreement between the seller 
and the consumer through general contract law avenues. For example, if 
the card does not work, or if there is no access number or 
authorization code, the consumer can claim failure of consideration. If 
the contract is too one-sided, a court may find it is unconscionable, 
but the doctrine of unconscionability has limited usefulness.\78\ 
Contract law is totally inadequate to protect consumers because it only 
provides a remedy for rights that the contract grants to consumers.\79\ 
Such contracts, one-sided agreements presented by the card seller on a 
take-it-or-leave-it basis, impose few obligations on card sellers.\80\
VI. Should Phone Cards Be Regulated at the State or Federal Level?
    Strong arguments can be made to support both the position that 
regulation of phone cards should be through Federal law and the 
contrary position that it should be through state law. We recommend a 
combination of both state and Federal legislation. A consideration of 
the merits of legislation if it were administered either by the states 
or by Congress illustrates the issues that inform our proposal.
    Despite the fact that most states are not eager to tackle this 
problem,\81\ several factors indicate that state regulation might be 
superior to Federal regulation. State regulation can be tailored to the 
needs of that state's residents. For example, a state with a large 
immigrant population may want to enact more protective rules than 
others. This would be justified because many card sellers specifically 
target low-income, non-English speaking groups that may be especially 
vulnerable to unfair practices.\82\ Such a state may want to enact 
bilingual disclosure requirements, with special attention given to 
international calls. That state may also feel a need for strong 
substantive protections, such as rules guaranteeing a right to redeem 
unused value and setting a minimum time to use a card before it 
expires. Because of the tenuous or non-existent legal status of many 
consumers targeted by those who market phone cards, they often refuse 
to sue companies that engage in illegal practices or to complain to 
government agencies.\83\ Special rules tailored to meet the needs of 
particular immigrant populations would have a better chance of being 
included in state law than in Federal legislation since lawmakers from 
states without large immigrant groups may not recognize or understand 
the importance of protecting them.
    In addition, states have administrative agencies with expertise in 
drafting regulations and enforcing rules related to 
telecommunications.\84\ Some states give the agencies crucial 
regulatory roles apart from issuing regulations. For example, in 
Illinois and Florida, providers of prepaid card services and resellers 
must receive a certificate of authority from a state agency.\85\ 
Retailers selling the cards must have proof that the provider or 
reseller has obtained the certificate.\86\ It is unlawful for companies 
to fail to comply with these requirements.\87\
    On the other hand, Federal legislation has several advantages over 
state regulation. The most obvious benefit is complete national 
coverage.\88\ Another benefit is uniformity.\89\ Complete and uniform 
national coverage helps both the industry and consumers. Many phone 
card companies sell cards in many states. Having one set of rules 
greatly lessens their regulatory burden. Furthermore, many companies 
sell cards on the Internet. A uniform set of rules greatly eases their 
regulatory burden since they are selling to consumers nationwide. The 
phone card industry may mount less opposition to a Federal law than to 
state laws because of the advantages of having to comply with only one 
law. They may actually support a Federal law in the belief it would 
discourage the majority of states that have not yet regulated phone 
cards from enacting their own laws.\90\
    In addition, uniform disclosures, standardized terms, and the same 
rights help produce educated consumers. This is especially important 
given the high mobility rates of people who live in the United 
States.\91\ Most will live in several states during their lifetimes. 
With a Federal law, they do not have to learn a new set of rules and 
definitions every time they move to a new state.
    A Federal rule may also lead to more effective enforcement than 
state law. An individual state may have great difficulty enforcing its 
laws against companies operating from different states, especially 
those selling on the Internet. Jurisdictional issues may frustrate 
enforcement.\92\ Enforcement by a Federal agency would obviate many of 
these difficulties.
    Lacking a Congressional mandate, no agency of the Federal 
Government has stepped forward to regulate this industry. Prepaid phone 
cards are payment devices.\93\ The Federal Reserve Board (FRB) has 
substantial experience regulating payment devices, but lacks experience 
regulating the telecommunications industry.\94\ Drafting regulations 
and enforcing them is better suited for an agency familiar with that 
industry. Prepaid phone cards provide access to telephone service. The 
agency with the most expertise in telecommunications, the FCC, has no 
experience dealing with payment devices. The FCC simply refers consumer 
complaints to the FTC, the Better Business Bureau, and state 
agencies.\95\ Moreover, any Federal agency to which Congress delegates 
the responsibility for regulation would not be as attuned to local 
problems as are state agencies.
    Although the FTC does not have a great deal of technical expertise 
in telecommunications, its Telemarketing Sales Rule indicates it is 
able to draft effective regulations related to telephone use.\96\ It 
has brought enforcement actions against companies offering prepaid 
cards.\97\ If Congress enacts Federal legislation to regulate prepaid 
phone cards, we believe the FTC is the most appropriate agency to issue 
regulations and enforce the Act.\98\
    As the above discussion demonstrates, there are substantial 
benefits to enacting legislation, either at the state or the Federal 
level. As we discuss in Part XI, we recommend that Congress enact 
Federal legislation. The Federal law, however, should not completely 
preempt state law. States would still be permitted to enact legislation 
tailored to the special needs of their consumers as long as that state 
law did not conflict with the Federal statute.\99\
VII. Analysis of the Nature of Phone Cards and Implications for 
        Drafting Applicable Law
    In order to understand current laws regulating phone cards and 
draft a Model Act, it is necessary to determine the nature of phone 
cards. In part, the card is a payment device. It is a type of stored 
value card like a prepaid gift card.\100\ But it is also a device that 
accesses a service. In this respect it is analogous to an ATM card that 
is used to access the financial services provided by ATMs.\101\ The 
prepaid phone card, however, is an integral part of a transaction for 
the provision of telecommunications services, a very specific type of 
service.\102\
    The fact that phone cards can be characterized in a variety of ways 
poses difficulties for evaluating current laws and choosing a body of 
law that may be appropriate for a Model Act. There is no general body 
of law governing stored value cards. Instead states have enacted laws 
that are very specific to the type of card regulated (gift card, phone 
card, payroll card), and there is great variation among the statutes 
governing each type of card. The phone card is used to access a service 
and there is no general law governing the sale of services. Those 
transactions are subject to the common law of contracts.\103\ 
Therefore, the ``law'' is determined by what the particular contract 
provides. Like an ATM card, the phone card accesses a service that can 
result in using the consumer's funds. Because of that similarity, it 
may be appropriate to use the Electronic Fund Transfers Act, which 
governs ATM cards, as a model.\104\ Indeed, the FRB recently has 
subjected another type of stored value card, the payroll card, to the 
same laws as ATM cards.\105\ Because phone cards access 
telecommunications services, some states incorporate selected aspects 
of their rules for those services.\106\
VIII. Analysis of Current Regulation
    This section analyzes the current regulation of phone cards. The 
analysis illustrates the wide variety of problems some states have 
chosen to regulate. It also demonstrates that states have not selected 
any uniform approach to regulating the cards. Finally, it shows that 
they have not used regulation of other devices, such as gift cards or 
ATM cards, as models for their phone card laws.
    There is no uniformity in the state law regulating phone cards. 
States have taken a wide variety of approaches. Some have imposed 
minimal regulation, while others subject the industry to many specific 
requirements.\107\ Some have enacted statutes, while others have issued 
agency regulations.\108\ However, as Part IX discusses, even the most 
comprehensive state laws completely ignore major issues.
    Recent studies \109\ demonstrate the need for adequate disclosure 
and for clearer explanations of the costs involved in making calls. 
Consumers need disclosures before they purchase cards in order to 
decide whether to buy a card and to compare prices among cards. The 
studies show, however, that cost of the card is a very complex matter. 
Consequently, consumers need standard terms that have a universal 
meaning and a standard format for presenting information, much like 
Truth in Lending. In addition, these studies show that consumers need 
access to customer service representatives who can answer specific 
questions and explain costs.\110\
    The first point of consumer contact and often principal marketing 
effort is advertising. Generally, advertisements do not provide as much 
information as is already available on the cards. Advertisements 
typically state the number of minutes one obtains when calling a 
specific city, such as Mexico City. However, advertisements may also be 
misleading. For example, they may state that no connection fees are 
charged,\111\ when in fact, there are many other hidden fees. Despite 
its importance, the Federal Government has not enacted rules regulating 
advertisements of prepaid phone card services.\112\ Additionally, the 
FTC has not aggressively enforced violations of the FTC Act in this 
area.\113\
    Consumer economic literature indicates that information from 
advertisements is often used by consumers in establishing reference 
prices.\114\ These reference prices are then used at the time of 
purchase.\115\ Misleading advertisements may negatively affect the 
consumer's purchase decisions. The FTC Act and state laws require ads 
to be truthful and not misleading, but consumers need more legal 
protection than merely a law that provides that an advertisement not be 
misleading. Consequently, consumers need advertising provisions similar 
to those enacted in California, which is currently the only state with 
a statute specifically regulating the advertisement of phone 
cards.\116\ California law requires that any such advertisement 
``include a disclosure of any geographic limitation to the advertised 
price, rate, or unit value, as well as a disclosure of any additional 
surcharges, call setup charges, or fees or surcharges applicable to the 
advertised price, rate, or unit value.'' \117\
    On the other hand, a law requiring advertisements to include 
certain information is not sufficient either. Some consumers purchase 
cards without seeing an advertisement. Others who see ads also need 
information at the point of purchase. Such consumers may not remember 
the information in the advertisement, or they may remember it 
incorrectly. Furthermore, consumers need much more information than any 
advertisement could adequately convey. As a result, many of the states 
that regulate phone cards require disclosures at the point of 
purchase.\118\
    Most states that regulate phone cards require very specific 
information to be disclosed on the card itself. One could argue that 
these laws are much too detailed, and that consumer choice in this 
competitive market should determine what information should be 
disclosed. However, the information that states require to be disclosed 
at the point of purchase reflects the problems consumers have 
encountered using the cards. The seller must print the name of the 
company on the phone card.\119\ Consumers need this information in 
order to contact the company when necessary, to complain about the 
company to law enforcement and to sue if a dispute cannot be resolved. 
State laws require the seller to print a toll-free customer service 
number on the card as well.\120\ As studies show, consumers of this 
product need access to customer service.\121\ They often have 
reasonable questions, given the nature of the services provided. 
Because of the low cost of each card, requiring the seller to provide a 
customer service number that is not toll-free would discourage 
consumers from contacting customer service.
    Some state laws also require the card seller to disclose a toll-
free network access number if such a number is required in order to 
access service.\122\ Fundamental fairness requires the seller to inform 
the consumer of that number. For the seller not to disclose it would 
amount to fraud as the seller would have the consumer's money, but the 
consumer would not have any service. Requiring the number to be toll-
free is justified because the access number merely permits the consumer 
to gain access to the system. Charges should not be imposed unless and 
until the consumer actually makes a call. The card also must disclose 
the authorization code if it is required to access service.\123\ As 
with the requirement that the card contain the access number, failure 
to disclose the authorization code would be fraudulent since the 
consumer would have paid but would then be unable to make any 
calls.\124\ Finally, states require the card to include the expiration 
date or policy, if any.\125\ In California, Florida, Missouri, and New 
York, cards that do not include this information are considered to be 
active for at least 1 year from the date of purchase or the date of the 
last recharge.\126\ In the State of Washington, if an expiration date 
is not disclosed on the card, it is considered ``unexpired 
indefinitely.'' \127\
    Other disclosures must be made either on the card or the packaging 
that comes with the card. It is necessary to give card sellers this 
choice because phone cards are small and all the required information 
may not fit. The manner of presentation is also important for 
disclosure to be meaningful. California, for example, requires the 
disclosure to be legible.\128\ In addition, the required information 
must be made ``available clearly and conspicuously in a prominent area 
immediately proximate to the point of sale of the . . . calling 
services.'' \129\ In Florida, if disclosures are not on the card or 
packaging, they must be displayed ``visibly in a prominent area at the 
point of sale . . . in such a manner that the consumer may make an 
informed decision prior to purchase.'' \130\
    In California, the required disclosures on the card or packaging 
include the ``value of the card'' as well as any surcharges, taxes or 
fees.\131\ The California statute provides a list of fees, illustrating 
the complexity of the product's pricing, and how sellers use a variety 
of different terms, all of which amount to additional cost to the 
consumer.\132\ Further, there are different requirements for disclosing 
surcharges for international calls.\133\ The seller also must disclose 
the minimum charge per call, the billing decrement, the recharge 
policy, if any, and the refund policy, if any.\134\
    There is no national uniform format for disclosures on phone cards, 
unlike disclosure for credit and debit card transactions.\135\ 
California, however, has tried to impose some uniformity on cards sold 
to consumers in its state.\136\ The statute requires the value of the 
card and the amount of the charges to be disclosed on the card or its 
packaging all in the same format.\137\ Moreover, if the value of the 
card is expressed in minutes, those minutes must be designated as 
either domestic or international.\138\ Finally, that designation must 
be printed on the same line as the value of the card in minutes or on 
the line immediately following.\139\
    In addition to written disclosures at the point of sale, Texas 
requires verbal disclosures at the beginning of each call.\140\ The 
consumer must be told the ``domestic minutes, billing increments, or 
dollars remaining'' on the prepaid account or card.\141\ In addition, 
when the balance on the credit card is almost depleted the company must 
provide a verbal announcement of that fact ``at least 1 minute or 
billing increment before the time expires.'' \142\
    California law recognizes that many sellers target specific ethnic 
groups.\143\ It requires that if a language other than English is used 
in the advertising or promotion of the card, or is used on the card or 
packaging (other than for dialing instructions), the required 
information on the card or packaging must also be disclosed in the 
language used to advertise or promote the card.\144\ If a language 
other than English is used on the card or packaging to provide dialing 
instructions for making a call or reaching customer service, the 
additional information required on the card or packaging must be 
disclosed in the language used to provide the dialing instructions or 
to reach customer service.\145\ Similarly, Texas requires that if a 
card is marketed in a language other than English, certain disclosures 
must be made in the same language.\146\ Bilingual cards are permitted 
as long as all of the required information is in both languages.\147\
    Laws which require sellers of prepaid telephone cards to provide a 
toll-free telephone number for customer service, and which establish 
requirements for that service are perhaps unique in the law of payment 
systems. If a person pays for goods and services with a check, the 
Uniform Commercial Code (UCC) does not require banks to provide any 
kind of customer service despite the importance of the financial 
services they provide.\148\ If the consumer pays using a credit card or 
debit card, Federal law imposes certain error resolution procedures, 
but the seller of such cards is not required to provide a phone number 
for contacting the seller.\149\ The seller is required only to resolve 
disputes, not provide information.\150\ Phone cards are a type of 
stored value card. Many states regulate another type of stored value 
card, the gift card, but no gift card laws require sellers to provide 
consumers access to customer service, much less toll-free access.\151\ 
Thus, those states having phone card laws requiring the seller to 
provide a toll-free customer service number are going beyond what is 
normally mandated in consumer protection legislation.\152\
    Requiring the seller to disclose a toll-free customer service 
number does not help consumers unless informed customer service 
representatives are available to answer the consumers' questions. The 
studies discussed previously illustrate the difficulties consumers have 
obtaining needed information from customer service.\153\ States vary in 
the degree to which they impose quality standards for customer service. 
California and New York have the most consumer-friendly requirements. 
The seller's customer service line must have live operators to answer 
calls twenty-four hours a day, 7 days a week.\154\ Other states provide 
that the seller must have a live operator available or must record 
consumer calls and have a live operator return the call within a 
specified period of time.\155\
    In some states, phone card laws go further than what is required in 
most consumer protection statutes by setting minimum performance 
standards for the services that customer service must provide. For 
example, California and New York require the operator to permit 
consumers to file complaints.\156\ In addition, the operator must be 
able to provide consumers with information about rates, surcharges, 
fees, policies on recharging cards, refunds, expiration dates, and the 
balance of usable minutes still available in the consumer's 
account.\157\
    A few states have gone beyond disclosure and customer service by 
providing substantive protection as well. They impose detailed 
requirements on charges and fees.\158\ These include mandating rules 
for rounding up to the next minute and prohibiting sellers from 
excessive rounding up.\159\ Some laws provide that the value of the 
card cannot be reduced by more than the charges printed on the card or 
the packaging or display at the point of sale.\160\
    State statutes also impose a wide variety of refund requirements. 
California and New York require sellers to give the consumer a refund 
if the service fails to operate in a ``commercially reasonable 
manner.'' \161\ Although this is a vague standard, the statutes at 
least establish that consumers are entitled to refunds.\162\ In 
Florida, consumers are entitled to a refund if service is ``rendered 
unusable for reasons beyond the consumer's control.'' \163\ Missouri 
requires a refund if the company ceases operations \164\ or can no 
longer provide service.\165\ Alabama requires a refund if service is 
suspended.\166\ Texas requires a refund if the company fails to provide 
service at the disclosed rates or the service fails to meet technical 
standards.\167\ Florida requires companies to have a refund 
policy.\168\ At a minimum, such a policy must provide for the consumer 
to receive a refund if the prepaid calling service is ``unusable for 
reasons beyond the consumer's control'' and the services ``have not 
[exceeded] the expiration period.'' \169\ Furthermore, the refund must 
be for the same amount as the value still on the card.\170\ Alaska 
requires a refund if the card does not work as represented or the 
required disclosures are not made to the customer.\171\ In addition, 
the Regulatory Commission of Alaska can direct that a refund be paid 
``for good cause.'' \172\ In Florida, a company ``may, but shall not be 
required to'' provide a refund for lost or stolen cards.\173\ States 
also require that the amount of the refund cannot be less than the 
value remaining on the card.\174\ The refund must be provided within 60 
days from the date the consumer notifies the company.\175\
    Some of the states that have enacted prepaid phone card laws have 
also imposed performance standards such as a minimum level of 
operational capacity for the service being provided. These requirements 
are in sharp contrast to the law governing other payment devices \176\ 
as well as the laws governing the quality of goods and services.\177\
    In California, companies must ``maintain access numbers with 
sufficient capacity to accommodate a reasonably anticipated number of 
calls without incurring a busy signal or undue delay.'' \178\ 
Apparently, failure to maintain that capacity would trigger 
California's requirement that consumers are entitled to a refund if a 
company fails to provide service in a commercially reasonable 
manner.\179\ Case law from other types of transactions may be useful in 
further defining what circumstances may be commercially 
unreasonable.\180\ Florida law formerly required that every company 
ensure that at least 95 percent of all call attempts to the company's 
toll-free customer service number be completed.\181\ Finally, there 
must be at least 97 percent accuracy of the length of the conversation.
    Another substantive protection relates to expiration policies. For 
example, California, Florida, and New York provide that if the card 
does not state a specific expiration date or policy, a card is 
considered active for at least 1 year from the date of purchase.\182\ 
In addition, if the card has been recharged, it must be active for 1 
year from the date of the last recharge.\183\ Sellers who consider the 
1-year minimum onerous can easily avoid its imposition simply by 
providing on the card that it expires within a shorter period of 
time.\184\ However, if the seller establishes an expiration date that 
is too short, for example 1 week, the consumer may be able to convince 
a court that the expiration date is unconscionable, in bad faith, or 
commercially unreasonable.\185\ Statutes do not impose a minimum period 
before a card expires.
    State statutes and regulations of phone cards do not include 
specific provisions providing that consumers can sue the card companies 
for violating these laws. Nevertheless, consumers in some states may be 
able to sue under their ``mini-FTC'' acts, alleging that a violation of 
the phone card requirements constitutes a deceptive or unfair act or 
practice.\186\ In other states, consumers may confront substantial 
barriers.\187\ A government agency, such as the state's public service 
commission, may be authorized to impose penalties for violation of the 
phone card laws,\188\ but consumers have no assurance they will do so, 
especially if the commission lacks sufficient resources or strong proof 
that violations are widespread.
IX. The Inadequacy of Warranty Law
    The UCC includes provisions on express and implied warranties that 
may be beneficial to consumers who purchase goods.\189\ The UCC, 
however, does not apply to the sale of services, which would include 
the sale of telephone services. The Federal Magnuson-Moss Warranty Act 
prohibits the disclaimer of implied warranties once a seller provides a 
written warranty.\190\ Unfortunately, the Act does not apply to the 
sale of services either.\191\
    Because neither the UCC nor the Magnuson-Moss Warranty Act applies 
to the sale of phone services, general contract law applies. Under 
contract law, courts will enforce express warranties. The seller, 
however, can avoid that result by carefully drafting the contract so it 
does not include any express warranties regarding the quality of the 
service provided to the consumer. Some courts have held that service 
contracts include implied warranties.\192\ The cases, however, do not 
involve provisions of telephone services or comparable services.\193\ 
Consequently, it is not at all clear how courts would apply those 
standards to prepaid phone service. Moreover, sellers most likely can 
avoid enforcement of the implied warranties by disclaiming them.\194\
X. Problems Not Addressed in Regulations
    As described above, while most states have not regulated phone 
cards at all, some which have enacted regulations have gone far beyond 
the protection accorded consumers using other types of payment devices. 
However, even the states with the most comprehensive regulations have 
failed to do anything to protect consumers who confront many serious 
problems. In order for our Model to accomplish its objective, it was 
necessary to identify the gaps in current law.
    For example, regulations include many required disclosures,\195\ 
but do not require sellers to inform consumers of their policy with 
regard to unilaterally changing the terms and conditions of providing 
service without prior notice to the consumer.\196\ Statutes do not 
require disclosure of the seller's policy on lost, stolen, 
unauthorized, or malfunctioning cards.\197\ Finally, statutes do not 
require sellers to inform consumers whether they can redeem unused 
value on their card, and if they can, how it can be redeemed and what 
charges may be imposed.\198\
    Statutes also fail to provide consumers with any protection if a 
card is lost or stolen.\199\ In addition, consumers may lose the piece 
of paper or other record on which they have written their Personal 
Identification Number (PIN) and may not have their PIN memorized.\200\ 
Without the PIN, the card cannot be used and the consumer loses the 
value of the balance remaining on the card.\201\ State law is deficient 
in not requiring the seller to replace the PIN. At the very least, 
statutes should require a warning to consumers about the consequences 
of losing their PIN. If the consumer cannot remember the PIN and the 
seller refuses to inform the consumer what the PIN is, or issue a new 
PIN, the balance of unused value remaining on the card becomes pure 
profit for the card issuer.\202\
    A card may also be defective. For example, the access number or the 
PIN may not work,\203\ or the card may have some other defect making it 
impossible to operate as it should.\204\ Consumers will lose the entire 
balance on the card if the card issuer refuses to replace the card. 
Statutes do not require card issuers to replace cards. Even if the 
issuer does replace cards, it may charge such a high fee that it is not 
economically advisable for consumers to purchase a replacement.
    Additionally, the card issuer may go out of business.\205\ The 
issuer may simply close its doors and disappear. Statutes provide 
purchasers of phone cards with no satisfactory remedy when this occurs. 
Alternatively, the issuer may file for bankruptcy, leaving consumers 
with unsecured claims that are unlikely to be satisfied.
    States do not regulate the amount of charges and fees. Rather, 
states require an issuer who charges fees for various services, to 
inform consumers about the fees.\206\ However, the disclosure 
requirements of state laws are not adequate. For example, states do not 
require sellers to inform consumers of the extra charges they incur if 
they use their phone card at a pay phone.\207\
    In states that have no laws regulating phone cards, the rights and 
obligations of the parties are governed by the contract between the 
card issuer and the consumer. In states with phone card laws, the many 
matters not regulated are subject to the terms of the contract. The 
contracts between issuers and consumers are not the result of a 
negotiated bargain between the parties, and, in fact the consumer never 
even signs the agreement. Rather, the law deems that consumers agree to 
the terms of the take-it-or-leave-it adhesion contracts by paying their 
money and using the card. The cards often include unilateral change of 
terms provisions under which the issuers can modify the contract's 
terms without notice to consumers.\208\ Those changes could deprive 
consumers of important rights they had under the contract when they 
originally bought the card or impose substantial new charges upon them. 
States have not enacted laws specifically governing this problem.
    Finally, even states that have enacted strong phone card laws do 
not include in those statutes provisions granting consumers explicit 
causes of action and meaningful remedies for violation of the law such 
as those included in Federal consumer protection statutes.\209\ This is 
a serious omission that may make the protections in the laws largely 
illusory.
    The Model Act described in the following section fills the gaps in 
current law by including provisions to deal with the issues identified 
above, that statutes do not address.
XI. Model Prepaid Telephone Card Act
    Based on the foregoing analysis of the problems consumers of 
prepaid telephone cards encounter, the information they need, the 
nature of the marketplace, the dismal prospects for self-regulation, 
and the inadequacy of the states' responses to date, we propose that 
Congress enact a Federal law to regulate phone cards. As discussed 
previously,\210\ a Federal statute provides benefits to both the 
industry and consumers that state laws cannot offer. Matters not 
included in the Federal statute are appropriate for individual states 
to adopt if they see fit to do so. Our proposal breaks very little new 
ground. Rather we have taken those features of state law that offer 
consumers needed protection and recommend that they be incorporated 
into a Federal law. Most of our suggestions represent approaches that 
states have already adopted. Therefore, it is reasonable to assume that 
they pose no significant technological or financial impediments to the 
prepaid phone card industry.
    Our Model Act covers those matters that should be governed by a 
Federal statute. Some matters are not included in our Model Act because 
we believe they are best left for the states to consider on an 
individual basis. These matters include licensing and registration of 
companies selling cards, the needs of residents with special needs, as 
well as regulation of rates and fees. If Congress refuses to pass phone 
card legislation, our Model Act should be enacted by each state.
    The Federal statute should establish a basic framework that ensures 
consumers a reasonable level of disclosure and protection. The statute 
should delegate to the FTC the task of issuing detailed regulations 
pursuant to the statute, filling in the details and responding to 
future changes in technology, marketing, and the marketplace.\211\ To 
assist card issuers in complying with the law and to reduce compliance 
costs, the statute should instruct the FTC to draft model disclosure 
forms for issuers to use if they wish.\212\ States would be permitted 
to enact their own laws as long as they were not inconsistent with the 
Federal statute.\213\
    The Federal statute should also regulate disclosures in 
advertising. As previously noted,\214\ advertising is important in 
inducing consumers to buy a certain brand of card. In addition, a 
Federal law is appropriate because a radio or television commercial or 
Internet ad can be seen and heard across state borders. The Federal law 
should incorporate the provisions of California's law that requires 
phone card advertisements to disclose geographic limits to the 
advertised price, rate, or unit value, as well as to disclose 
additional surcharges, call setup charges, or fees applicable to the 
advertised price, rate, or unit value.\215\ The FTC should be 
authorized to issue additional disclosures from time to time if it 
finds they are needed. This flexibility is appropriate given the new 
advertising avenues that emerging technologies continue to make 
possible.\216\
    The Federal law should require disclosures that are available to 
consumers prior to purchasing prepaid phone cards. Disclosure plays a 
crucial role in phone card transactions because of the manner in which 
consumers become bound by the terms of the contract. As is evident from 
the discussion in this article, the purchase and use of phone cards 
involves many elements. Some of the features of this service are 
complex and confusing, such as the calculation of fees and charges. 
Consumers and card issuers do not enter into a formal written contract 
that includes the terms of agreement, with consumers expressing their 
agreement to be bound in some manner, such as signing the contract. 
Instead, the card issuer notifies the consumer of rights, obligations, 
restrictions, limitations, and conditions on the card or in the 
packaging, and the consumer purchases the card. Therefore, the consumer 
does not participate in the negotiation of the terms. Courts uphold the 
enforceability of these types of contracts, finding that consumers have 
accepted and are bound by any terms of which they have notice if they 
use the product after having opportunity to discover those terms.\217\ 
In order to ensure the fairness and reasonableness of the terms that 
bind the parties, it is essential that the law require certain 
disclosures that become part of the contract.
    The Federal law should require certain disclosures on the card 
itself. This includes the name of the company issuing the card and a 
toll-free customer service number. The card also should give a toll-
free network access number if that is required in order to access 
service. The card must disclose the authorization code if one is 
required to access service. Most states that have enacted legislation 
include these disclosure requirements.
    The Federal statute should require that all cards have an 
expiration date, and that the date can be no shorter than 1 year after 
activation. This information is vital for the consumer to have. 
Therefore, there should be significant consequences if the card does 
not include that disclosure. The Federal statute should follow the laws 
enacted in Washington and Texas \218\ and provide that if a seller 
fails to make that disclosure, the card is active indefinitely.
    The Federal statute should follow the pattern of state law by 
requiring other disclosures, but permitting the issuer to make them 
either on the card or on the packaging that comes with the card. 
Additionally, the issuer should be required to make the disclosures 
available at the point of sale.\219\ Disclosures should include all 
charges, taxes, and fees.\220\ The seller should disclose the minimum 
charge per call, extra charges imposed for calls from pay phones, the 
billing decrement, the recharge policy, if any, and the refund 
policy.\221\ The FTC should have the authority to regulate further in 
this area. For example, phone card issuers may impose new types of 
charges and conditions. The statute should define charges and 
conditions in general terms so the FTC can issue regulations under its 
disclosure authority to include these new costs.
    Surcharges for international calls deserve special attention. Those 
making international calls have a special need for clear and accurate 
information. Therefore, it is important that the surcharges for 
international calls not be buried in with the other disclosures. 
Consequently, the statute should provide that if international calls 
are a significant focus of the issuer's marketing or if a substantial 
portion of the calls made on its cards are subject to surcharges for 
international calls, the issuer must make the disclosure of those 
surcharges in a prominent place on the card as well as on the packaging 
and at the point of sale. The statute should delegate to the FTC the 
responsibility to issue regulations further specifying the 
circumstances under which the special rules for international calls 
apply.
    Consumers also need to know the balance remaining on their cards. 
Otherwise, when they have an important call to make, they may 
mistakenly believe they have more time than they actually have to make 
their call. The Federal law should follow Texas' lead by requiring 
verbal disclosures at the beginning of each call informing the consumer 
of the minutes, billing increments, or dollars remaining on the 
card.\222\ When the balance on the card is nearly exhausted, the issuer 
should be required to inform the consumer verbally that the time is 
about to expire.\223\
    Furthermore, the Federal statute should require several disclosures 
not mandated by state statutes. Sellers should have to inform consumers 
of their policy with regard to unilaterally changing the terms and 
conditions of providing service without prior notice to the 
consumer.\224\ Even better would be a provision requiring sellers to 
notify consumers beforehand of all proposed changes. Notification could 
be given verbally at the beginning of the consumer's call using the 
card.\225\ The consumer should be given the option of refusing to agree 
to the change. If the consumer refuses, she should be entitled to a 
refund of the unused value on the card. Sellers should be prohibited 
from charging a fee to obtain the refund.
    Sellers should be required to disclose their policy on lost, 
stolen, unauthorized, and malfunctioning cards.\226\ In addition, the 
Federal statute should require sellers to inform consumers whether they 
can redeem unused value on their card, and if they can, how it can be 
redeemed and what charges may be imposed.
    The statute should mandate the use of standard uniform terms that 
would be defined in the statute. This would enable consumers to 
comparison shop. Uniform terms would have uniform meanings, regardless 
of the state where the consumer purchased the card. In addition to 
requiring standard terms, certain terms should be prohibited to prevent 
the confusing and contradictory wording that many agreements 
contain.\227\ For example, some companies state there is no connection 
fee, leading consumers to believe there are no additional fees.\228\ 
This claim is misleading because instead of that fee they impose a fee 
at the conclusion of each call, called a ``post-call'' or ``hang-up'' 
fee. Sellers should be required to use a standard term that would apply 
to all fees imposed per call. Companies impose periodic charges for 
maintenance fees.\229\ The statute should require companies to use a 
standard term that would apply to all such maintenance fees. Companies 
should not be allowed to confuse consumers by using a variety of terms 
for such charges such as ``administrative fee'' or ``service fee.'' The 
statute should require a standard format for charges imposed for taxes. 
Standard uniform terms would benefit card issuers as well as consumers 
because the standardization would be easier for issuers to comply with 
than various state laws with differing requirements and definitions. 
The statute should authorize the FTC to develop a standard format for 
disclosures and model forms.
    The Federal statute should require that if the issuer uses a 
language other than English in advertising or promoting the card, or on 
the card or its packaging, then the required disclosures on the card or 
packaging must also be in that other language.\230\ If another language 
is used to provide dialing instructions for making calls or calling 
customer service, the disclosures required to be on the card or its 
packaging also must be in that other language.\231\
    Disclosure by card companies alone is not sufficient.\232\ The 
Federal statute should also require dispute resolution procedures and 
substantive rights and protections. The Federal statute should ensure 
the effectiveness of customer service or else consumers will be at a 
severe disadvantage in learning essential information and seeking 
solutions for problems that arise. Issuers should be required to 
provide a toll-free telephone number for customer service, with that 
number clearly disclosed on the card itself. The issuer should be 
required to have an adequate number of trained, live operators 
available at least Monday through Friday, 8 hours each day.\233\ The 
statute should require that the issuer record all calls made at other 
times, and that the recorded calls be returned no later than the end of 
the next business day.\234\ Consumers should have the right to file 
complaints when they call customer service,\235\ and the issuer should 
be required to investigate within ten business days, crediting the 
consumer's card or providing a refund if the consumer's complaint is 
justified.\236\ Consumers also need information when they call, and the 
issuer's customer service operators should have the capacity to provide 
information about rates, surcharges, fees, refunds, expiration dates, 
recharging cards, and the available balance.\237\
    The Federal statute should include rules for rounding charges up to 
the next minute and should prohibit excessive upwards rounding.\238\ 
Federal law should also prohibit the issuer from reducing the value of 
the card by more than the charges printed on the card or the packaging 
or information displayed at the point of sale.\239\ Moreover, the 
seller should be prohibited from imposing a fee if there is no 
connection made to the party dialed.
    The Federal statute should require the issuer to provide a refund 
when the issuer fails to provide service at the disclosed rates or 
charges more than disclosed or allowed.\240\ In addition, the consumer 
should receive a refund if the phone service fails to meet certain 
technical standards.\241\ Refunds are warranted if service is 
suspended, terminated,\242\ or unusable.\243\ Consumers should be 
entitled to a refund if the service does not work as represented, the 
required disclosures are not made,\244\ or the card is defective. 
Consumers should also be able to receive a refund of the unused balance 
on their card if they report their card as lost or stolen and the 
issuer has the capacity to block all future use of the card after 
receiving the consumer's notice.\245\
    There may be other circumstances under which refunds should be 
required. Therefore, the statute should include more general standards 
as well. California and New York's models require a refund of at least 
the value remaining on the card if the service fails to operate in a 
``commercially reasonable manner.'' \246\ Other examples of general 
standards are provisions requiring a refund if the issuer fails to 
exercise ordinary care, acts in bad faith, or uses a contract that 
includes unconscionable terms.\247\
    The Federal statute should impose minimum performance standards. 
The seller should be required to have the capacity to accommodate a 
reasonably anticipated number of calls without consumers encountering a 
busy signal or unreasonable delay.\248\ The FTC should set requirements 
for what percentage of calls must be completed and the accuracy of the 
company's calculation of the conversation time.\249\
    The Federal statute should also include a guaranty stating that 
both the card and the service provided meet minimum standards. 
Accordingly, it should provide that there is an implied warranty of 
merchantability in every phone card transaction. This is the law under 
the UCC with regard to the sale of goods.\250\ Unlike the UCC, however, 
the issuer should not be allowed to disclaim that implied 
warranty.\251\
    The Federal statute should establish a maximum cap on a consumer's 
liability as long as the card issuer has the ability to block access so 
the thief cannot continue to use the card.\252\ If the issuer does not 
have that ability, the law should require a prominent disclosure on the 
card or its packaging that the purchaser will lose the entire balance 
on the card if it is lost, stolen, or used in an unauthorized fashion, 
if that is the issuer's policy.
    Consumers may lose their PINs rendering the card useless and 
resulting in the loss to the consumer of the value remaining on the 
card.\253\ A seller should be required to supply a new PIN if the 
consumer notifies the seller and the seller has the ability to block 
access to anyone using the lost PIN. If the seller lacks the ability to 
block access and does not want to provide consumers any relief, the 
Federal statute should require the seller to clearly warn consumers 
either on the card or its packaging that they have no protection if the 
PIN is lost.
    Additionally, the statute should require sellers to replace 
defective cards.\254\ Consumers will lose the entire balance on the 
card if the card issuer refuses to replace it. The law should prohibit 
sellers from charging more than a reasonable fee for a 
replacement.\255\ If sellers can charge exorbitant replacement fees, it 
will be economically inadvisable for the consumer to order a 
replacement.
    Consumers need meaningful remedies otherwise they have no means for 
recovering the losses they incur as a result of violations of the law. 
The Federal statute should include the remedies contained in Federal 
consumer protection laws, providing for actual damages, statutory 
damages, costs and attorney's fees.\256\ Class actions should be 
expressly permitted, or else litigation will not be feasible, given the 
small amount of each individual's damages. Predispute mandatory 
arbitration should be prohibited.\257\
    The recommendations made thus far should be in a Federal statute or 
accompanying FTC regulations. They involve national problems that are 
best dealt with on a uniform nationwide basis both to ensure that 
consumers can enjoy a basic level of protection wherever they live and 
to lower compliance costs for the industry. If Congress fails to enact 
a law, however, states should pass their own statutes, using the above 
as a model, and delegating regulatory authority to the appropriate 
state agency.
    Some issues are best dealt with on a state basis rather than 
through a Federal law. Examples of this include the licensing and 
registration of companies. Some states require this already, and the 
rest should be encouraged to consider it. States also should require 
companies to post a bond so consumers will have a fund from which they 
can be compensated in case a company goes out of business. Some states 
require phone card companies to file tariffs listing all of their rates 
and fees, with a state agency empowered to reject those rates.\258\ We 
believe it best to leave that decision to the states rather than 
establish a Federal bureaucracy to oversee rate regulation for all 
sellers. While lawmakers generally are reluctant to regulate fees, 
regulation of phone card fees is warranted because of the low income 
and vulnerable status of many of the consumers who are specifically 
targeted by the industry. Consequently, states should consider enacting 
laws prohibiting rates above a certain amount, as states already do for 
consumer credit. There is a great deal of diversity in the demographic 
characteristics of various states. Individual states may find it 
necessary to enact special protections for vulnerable groups within 
their states, such as immigrants.
    Finally, Federal and state laws governing phone cards should 
prohibit waiver of the requirements mandated in the laws. Strong 
consumer protection laws do not benefit consumers if sellers can 
enforce contractual provisions by which consumers agree to waive 
provisions in those laws intended to benefit and protect them.
XII. Conclusion
    Empirical studies indicate that consumers have difficulty obtaining 
necessary information about prepaid telephone cards before purchase. 
Information is often unavailable, misleading, and confusing. There is 
no Federal regulation of prepaid phone cards. Although numerous states 
have statutes or administrative regulations, they vary widely and many 
states have no laws regulating phone cards. Both card issuers and 
consumers could be better served with Federal legislation.
    This article presents a case for Federal legislation and a proposed 
model act which would draw upon the best of current state regulations. 
The Federal Trade Commission is the suggested avenue for administrative 
agency regulations and enforcement of the proposed legislation. The 
Federal legislation also must provide a private right of action for 
consumers, providing them with meaningful remedies when they are 
injured due to a company's failure to comply with the law. However, a 
few issues should be left to the states' discretion. If Congress fails 
to enact legislation, the states should pass the model act.
Footnotes
    * Mark E. Budnitz is a Professor of Law at Georgia State 
University College of Law. He holds a B.A. from Dartmouth College and 
J.D. from Harvard Law School. Professor Budnitz gratefully acknowledges 
the research assistance of Jodi L. Green, a student at GSU College of 
Law.
     Martina Rojo is a Professor of Law in the 
School of Law at the Universidad del Salvador, Argentina. She holds a 
J.D. from the Universidad del Salvador, Argentina and L.L.M. from the 
University of Georgia. The author has researched and published in the 
areas of Consumer Law, Comparative Law and Law and Economics.
    = Julia Marlowe is an Associate Professor in the 
Department of Housing & Consumer Economics at the University of 
Georgia. She holds a B.A. from The University of New Mexico, 
Albuquerque, and M.S. and Ph.D. in Consumer Economics from The 
University of Tennessee, Knoxville. The author wishes to thank the 
University of Georgia President's Venture Fund and the Georgia 
Governor's Office of Consumer Affairs for funding the research.
    \1\ Mitch Morrison, Paying Dividends: The Prepaid Category 
Continues to Grow and it's Not Just Phone Cards Anymore, 39 Convenience 
Store News 48 (2003).
    \2\ Brian Cook, Thomas K. Crowe & Jo Ann Scott Cullen, Experts 
Predict--Prepaid Forecast 2002, Intele-Card News, Jan. 2001, http://
www.intelecard.com/story_home.asp?StoryID=342 (last visited Sept. 11, 
2006); Richard Gutwillig, Calling on Savvy, 55 Supermarket Bus. Mag. 89 
(2000).
    \3\ Michael Browne, Generally Speaking: Selling a Variety of 
General Merchandise Draws Customers, High Margins, 40 Convenience Store 
News 37, 37 (2004).
    \4\ Howard Segermark, Why Market Phone Cards? 30 Nat'l Petroleum 
News 30, 30 (June 2002).
    \5\ Cook, Crowe and Cullen, supra note 2, at 14; Gutwillig, supra 
note 2 (reporting that card sellers are targeting home-based businesses 
and traveling salespersons). Military personnel also are major users of 
prepaid calling cards. FCC Taps Calling Cards for Access, USF Payments, 
Telecom Pol'y Rep., July 10, 2006.
    \6\ Gutwillig, supra note 2. Digitac sells computers and computer 
services. Id. http://www.digitac.com.aa (last visited Sept. 27, 2006).
    \7\ Mary Louise Pickel, Phoning Mexico . . . for profit, Atl. J.-
Const., June 8, 2006; Cook, Crowe and Cullen, supra note 2; Gutwillig, 
supra note 2.
    \8\ Alan R. Andreasen, Disadvantaged Hispanic Consumers: A Research 
Perspective and Agenda, 16 J. of Consumer Aff. 46, 48 (1982); Jinkook 
Lee & Horacia Soberon-Ferrer, Consumer Vulnerablity to Fraud: 
Influencing Factors, 31 J. of Consumer Aff. 70, 72 (1997).
    \9\ Julia Marlowe, Investigation of Pre-Purchase Information on 
Prepaid Telephone Cards, Report to the Georgia Governor's Office of 
Consumer Affairs 1 (Sept. 2005); Julia Marlowe and Martina Rojo, 
Consumer Problems With Prepaid Telephone Cards, 51 Consumer Ints. Ann. 
126, 128-30 (2005).
    \10\ The Mexico Tri Color card, purchased in 2005, provides an 
example of misleading information. The card reads ``sin cargo de 
conexion'' on the front in large print, but the small print on the back 
reads ``cargos de conexion aplicaran.'' The statement on the front 
informs the consumer there are no connection charges, but the statement 
on the back says the opposite. Marlowe and Rojo, supra note 9, at 127. 
Customer service representatives sometimes provide confusing 
information. For example, one told a consumer the phone card had a 
``maintenance fee of $0.50 every one or 2 days.'' Id.
    \11\ AT&T v. Ting, 182 F. Supp.2d 902, 930 (N.D. Cal. 2002), aff'd 
319 F.3d 1126 (9th. Cir. 2003), cert. denied, 124 S. Ct. 53 (2003); see 
Jean Sternlight, As Mandatory Binding Arbitration Meets the Class 
Action, Will the Class Action Survive? 42 Wm. & Mary L. Rev. 1 (2000).
    \12\ According to the U.S. Census Bureau, 37 million people in the 
United States live in poverty. Bradley R. Schiller, Fluid Poverty, 
Albany Times Union, Sept. 24, 2006 (noting that more than 20 percent of 
Hispanics in the United States live in poverty).
    \13\ See, e.g., Press Release, FTC, Marketer of Pre-Paid Cards 
Agrees to Settle Charges of Failing to Disclose Actual Cost of Using 
Card; Additional Charges Per Call Added, Some Cards Incurred Monthly 
Maintenance Fee (Mar. 4, 1999).
    \14\ Phone Card Issuers Must Pay Access Fees, N.Y. Times, July 4, 
2006, at C9 (reporting that the FCC ruled AT&T must make Universal 
Service Fund payments on its prepaid calling card transactions).
    \15\ See Phillip Nelson, Information and Consumer Behavior, 78 J. 
of Pol. Econ. 311, 312 (1970).
    \16\ Segermark, supra note 4, at 30.
    \17\ Marlowe, supra note 9, at 4-5; Marlowe and Rojo, supra note 9, 
at 128.
    \18\ Nancy Luna, Phone Card or PhonyCard? Orange County Reg., Aug. 
20, 2005 (reporting experience of consumer who was never able to use 
her defective card to make a call).
    \19\ Julia Marlowe and Jorge H. Atiles, Consumer Fraud and Latino 
Immigrant Consumers in the United States, 29 Int'l J. of Consumer Stud. 
391, 395-96 (2005).
    \20\ Id. at 395-96.
    \21\ Marlowe and Rojo, supra note 9, at 130-31.
    \22\ Id. at 132-33.
    \23\ Id. at 133.
    \24\ Id. at 130.
    \25\ Id.
    \26\ Marlowe and Rojo, supra note 9, at 130.
    \27\ Id.
    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ Marlowe and Rojo, supra note 9, at 130.
    \32\ Id.
    \33\ Id. at 132.
    \34\ Id. at 133.
    \35\ Id.
    \36\ Marlowe and Rojo, supra note 9, at 133.
    \37\ Id.
    \38\ Id.
    \39\ Id. at 130.
    \40\ Id.
    \41\ Marlowe and Rojo, supra note 9, at 130.
    \42\ Id. at 131.
    \43\ Id.
    \44\ Marlowe, supra note 9, at 18-19.
    \45\ Id. at 4.
    \46\ Id.
    \47\ Id. at 4-5.
    \48\ Id. at 4.
    \49\ Julia Marlowe and Francisco Diaz, Verification of Advertised 
Claims for Prepaid Phone Cards (Working Paper, 2006).
    \50\ Marlowe, supra note 9, at 4.
    \51\ Id.
    \52\ Id.
    \53\ Id.
    \54\ Id. at 5.
    \55\ Marlowe and Rojo, supra note 9, at 132.
    \56\ Id.
    \57\ Marlowe, supra note 9, at 4.
    \58\ Id. at 4-5.
    \59\ Cal. Bus. & Prof. Code  17538.9(12) (West 2006) (a customer 
is not considered connected if the customer receives a busy signal or 
the call is unanswered); Al. Pub. Serv. Comm'n Rule T-18.1(7) (1997) 
(usage rates can be charged only for connected minutes); 16 Tex. Admin. 
Code  26.34(e)(2) (2000) (account may be decreased only for completed 
calls; busy signals and unanswered calls are not considered completed).
    \60\ ITA Phonecard Disclosure Guidelines, The Int'l Telecard Ass'n 
Standards Comm., June 5, 2000.
    \61\ Id.
    \62\ Howard Segermark, Executive Director, International Prepaid 
Communications Association, personal interview with Julia Marlowe and 
Martina Rojo, at the offices of the Association, 904 Massachusetts 
Avenue, Washington, D.C., March 29, 2004. The International Prepaid 
Communications Association is the successor organization to the 
International Telecard Association.
    \63\ Compare ITA Phonecard Disclosure Guidelines, supra note 60, 
with the Model Act discussed infra in Part XI. For example, the IPCA 
standards do not include any rules on advertising. They do not require 
a minimum period before the card expires or redemption of unused value. 
Card issuers are not required to replace defective cards.
    \64\ Marlowe and Rojo, supra note 9, at 131.
    \65\ Id.
    \66\ Id.
    \67\ Gutwillig, supra note 2.
    \68\ Marlowe, supra note 9, at 3.
    \69\ 15 U.S.C.  45(a)(1) (2006).
    \70\ Id.  45(a).
    \71\ Id.  45(a)(1).
    \72\ Id.
    \73\ The FTC Act merely declares unfair and deceptive acts to be 
unlawful. 15 U.S.C.  45(a)(1) (2006). It does not establish any 
requirements for disclosure of essential information, levels of 
performance, customer service or error resolution.
    \74\ See infra Part X discussing problems not dealt with in any 
laws.
    \75\ Michael M. Greenfield, Consumer Law: A Guide for Those Who 
Represent Sellers, Lenders, and Consumers 160, 559 (Little, Brown 
1995).
    \76\ Courts in some states have made it very difficult for 
consumers to bring actions under these laws. See, e.g., Zeeman v. 
Black, 273 S.E.2d 910, 915 (Ga. Ct. App. 1980) (imposing a ``public 
interest'' requirement that is not included in the statute).
    \77\ E.g., Ga. Code Ann.  10-1-399(a) (2006).
    \78\ Most courts require consumers to prove both procedural and 
substantive unconscionability. Greenfield, supra note 75, at 529-34. To 
prove procedural unconscionability the consumer must show the process 
under which the consumer entered into the contract was unconscionable. 
To prove substantive unconscionability, the consumer must prove the 
terms in the contract were unconscionable. Some courts allow the 
doctrine to be raised only as a defense, which means consumers can 
challenge a contract as unconscionable only if the seller has sued 
them. They cannot use it affirmatively as the basis of their own 
lawsuit against the seller. Rosboro Lumber Co. v. Employee Benefits 
Ins. Co., 672 P.2d 1336, 1338 (Or. Ct. App. 1983), rev'd on other 
grounds, 680 P.2d 386 (Or. 1984).
    \79\ See generally Official Comment U.C.C.  1-203 (2005). The 
Comment provides that ``failure to perform or enforce, in good faith, a 
specific duty or obligation under the contract, constitutes a breach of 
that contract. . . . [T]he doctrine of good faith merely directs a 
court toward interpreting contracts within the commercial context in 
which they are created, performed and enforced, and does not create a 
separate duty of fairness and reasonableness which can be independently 
breached.''
    \80\ See generally Discover Bank v. Superior Court, 30 Cal. Rptr. 
3d 76, 113 P.3d 1100, 1109-10 (Cal. 2005) (stating that adhesion 
contracts are unconscionable, ``at least to the extent they operate to 
insulate a party from liability that otherwise would be imposed under 
[state] law'').
    \81\ This is in contrast to gift cards. Far more states have 
enacted laws regulating that type of stored value card. Mark Budnitz & 
Margot Saunders, Consumer Banking & Payments Law Credit, Debit & Stored 
Value Cards, Checks, Money Orders, E-Sign, Electronic Banking and 
Benefit Payments 178-79 (National Consumer Law Center 3rd ed. 2005).
    \82\ Prepaid phone cards have been identified as a key problem area 
for Hispanics. Federal Trade Commission, Hispanic Outreach Forum & Law 
Enforcement Workshop: A Summary of the Proceedings, at 8 (Oct. 2004), 
http://www.ftc.gov/reports/hispanicoutreach/hispanic
outreach.pdf. (last visited Sept. 11, 2006). Fraudulent practices 
involving the cards are ``likely to be targeted to immigrant 
populations.'' Id. at 9. ``Hispanics are noted for their trusting 
nature, which means they maybe easier prey for scam artists.'' Id. at. 
8. See generally Hoover's In-Depth Company Records, Ace Cash Express, 
Inc. Aug. 24, 2005 (reporting that Ace Cash Express, Inc. targets 
consumers who do not have bank accounts, selling them prepaid phone 
cards, and controversial products such as payday loans).
    \83\ Hispanic Outreach Forum & Law Enforcement Workshop: A Summary 
of the Proceedings, supra note 82, at 10. ``. . . the concept of the 
government protecting consumers may be foreign to many Hispanics.'' Id.
    \84\ Administrative agencies in the following states have 
regulations pertaining to prepaid phone cards. Al. Pub. Serv. Comm'n 
Rule T-18.1 (2000); Fla. Admin. Code Ann. r. 25-24.900-935 (2006); Mo. 
Code Regs. Ann. tit. 4,  240-32.160-70 (2006); 16 Tex. Admin. Code  
26.34(e)(4) (2000).
    \85\ 815 Ill. Comp. Stat. 505/2QQ (2006); Fla. Admin. Code Ann. r. 
25-24.910 (2006). Some states require providers of the service to file 
tariffs. Fla. Admin. Code Ann. r. 25-24.915 (2006); 16 Tex. Admin. Code 
 26.34(e)(1) (2000).
    \86\ Id.
    \87\ Id.
    \88\ ``. . . Federal law applies nationally.'' Salt Lake Tribune 
Publ'g Co. v. Mgmt. Planning, Inc., 390 F.3d 684, 688 (10th Cir. 2004).
    \89\ ``Because Federal law applies nationally,'' courts should 
assume ``that Congress desires national uniformity in the application 
of its laws.'' Id. See Laura S. Langley, Sperm, Egg, and a Petri Dish, 
27 J. Leg. Med. 167, 206 (2006) (proposing Federal legislation because 
it would create uniformity among the states).
    \90\ See, for example, the industry's response to state laws 
requiring companies to notify consumers when there is a security breach 
resulting in the possible exposure of personal information about 
consumers. Katie Kuehner-Hebert, Data Privacy Now Issue for States, 170 
Am. Banker 1, Mar. 28, 2005 (noting how businesses prefer a Federal 
statute over a patchwork of state laws).
    \91\ Fourteen percent of the people in the United States, totaling 
40 million people, move or change their address every year. Stephanie 
Fiereck, Focus on Class Action, New Jersey Law., Oct. 31, 2005 (relying 
on data from the U.S. Census Bureau's Geographical Mobility Study 2002-
2003).
    \92\ E.g., Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d. 883, 
887 (6th Cir. 2002); Gator.com Corp. v. L.L. Bean, Inc., 341 F.3d 1072, 
1075 (9th Cir. 2003).
    \93\ Prepaid phone cards are analogous to payment devices such as 
credit cards, that are defined as devices for ``the purpose of 
obtaining . . . property . . . or services.'' 15 U.S.C.  1602(k) 
(2006).
    \94\ The Federal Communications Commission has authority to 
regulate interstate telephone service. 47 U.S.C.  201 (2006). See AT&T 
Corp. v. Iowa Util. Bd., 525 U.S. 366, 384 (1999) (clarifying the FCC's 
rulemaking authority under the Telecommunications Act).
    \95\ FCC, Prepaid Phone Cards: What Consumers Should Know, http://
ftp.fcc.gov/cgb/consumerfacts/prepaidcards.html (last visited Sept. 11, 
2006).
    \96\ FTC Telemarketing Sales Rule, 16 C.F.R.  310 (2006).
    \97\ FTC v. PT-1 Commc'ns, Inc., Civ. Action No. 99-1432 (S.D.N.Y. 
1999) (stipulating final judgment and order for permanent injunction 
and consumer redress against defendant PT-1 Communications, Inc.).
    \98\ As discussed infra in Part XI, we propose that states be 
allowed to enact their own legislation if it is not inconsistent with 
the Federal law. State administrative involvement may be needed if a 
state wishes to require sellers to register or follow the example of 
some states that require sellers to obtain a certificate of authority 
or certificate of public convenience. E.g., Al. Pub. Serv. Comm'n Rule 
T-18.1 (2000); Fla. Admin. Code Ann. r. 25-24.910 (2006); Mo. Code 
Regs. Ann. tit. 4,  240-32.150(1) (2006); 815 Ill. Comp. Stat. 505/
2QQ(b) (2006).
    \99\ Other Federal consumer protection laws demonstrate how 
consumers can get the benefit of national coverage as well as 
protection for special local needs. These laws establish a national 
floor of minimum requirements. Rather than completely preempting state 
law, they permit states to enact laws that provide consumers with 
greater protection as long as the state's law is not inconsistent with 
the Federal law. E.g., Truth in Lending Act, 15 U.S.C.  1666(j) 
(2006); Electronic Fund Transfers Act, 15 U.S.C.  1693(q) (2006); Fair 
Debt Collection Practices Act, 15 U.S.C.  1692(n) (2006).
    \100\ Christopher B. Woods, Stored Value Cards, 59 Cons. Fin. Qtly. 
Rep. 211, 211 (2005). One commentator suggests that the card issuer has 
special legal duties that arise from the fact that the card is prepaid. 
``And a fiduciary responsibility is involved for those who take money 
prior to providing service.'' Howard Segermark, Ensuring Fair 
Competition Remains Regulatory Challenge for Prepaid, Phone Plus Mag., 
Mar. 2001, available at: http://www.phoneplusmag.com/articles/
131soap.html (last visited Sept. 11, 2006). Segermark is Executive 
Director of the International Prepaid Communications Association.
    \101\ ATMs can be used to perform a variety of services including 
cash deposits, cash withdrawals, balance inquiries, and transfers from 
one account to another. Candace Heckman, Getting Money Back After ATM 
Theft Proving To Bank You're A Victim Is The Hard Part, Seattle Post 
Intelligencer, Aug. 9, 2006 (describing thefts involving ATM balance 
inquiries and ATM withdrawals); Citibank Home Page, http://
www.citibank.com (describing ATM features enabling customers to 
withdraw cash and make transfers from one account to another) (last 
visited Sept. 27, 2006); Bank of America Home Page, http://
www.bankofamerica.com (describing ATM features enabling customers to 
make withdrawals, make transfers from one account to another, and make 
balance inquiries (last visited Sept. 27, 2006).
    \102\ See e.g., 47 U.S.C.  251 (2006) (prescribing the duties of 
telecommunications carriers).
    \103\ E.g., Cont'l Dredging, Inc. v. De-Kaizered, Inc., 120 S.W.3d 
380, 394 (Tex. Ct. App. 2003).
    \104\ The applicable law is the Electronic Fund Transfers Act, 15 
U.S.C.  1693 et seq.
    \105\ 71 Fed. Reg. 51437 (2006) (to be codified at 12 C.F.R. pt. 
205) (Final Rule, effective July 1, 2007).
    \106\ E.g., in Texas, prepaid calling card services companies are 
required to register with the Public Service Commission. 16 Tex. Admin. 
Code  26.34 (2000).
    \107\ Compare Al. Pub. Serv. Comm'n Rule. T-18.1 (1997) (requiring 
only the disclosure of essential information), with Cal. Bus. & Prof. 
Code  17538.9(b)(1) (West 2006) (covering advertising, disclosures, 
refunds, and customer service).
    \108\ Id.
    \109\ Marlowe and Rojo, supra note 9, at 134-35; Marlowe, supra 
note 9, at 9.
    \110\ Id.
    \111\ Marlowe, supra note 9, at 4.
    \112\ See Federal Trade Commission, http://www.ftc.gov, listing all 
the FTC's guides and policy statements on advertising, none related 
directly to prepaid phone card services. (last visited Sept. 27, 2006).
    \113\ Chester S. Galloway, Herbert Jack Rotfield and Jef I. 
Richards, Holding Media Responsibile for Deceptive Weight-Loss 
Advertising, 107 W. Va. L. Rev. 353, 383 (2005) (stating that the FTC 
does not have the resources to investigate many cases of deceptive 
advertising). The FTC, however, has brought at least one action against 
a phone card company. See supra text at note 97.
    \114\ Edward A. Blair, Judy Harris and Kent B. Monroe, Effects of 
Shopping Information on Consumers' Responses to Comparative Price 
Claims, 78 J. of Retailing 76 (2002); Larry D. Compeau, Dhruv Grewal 
and Rajesh Chandrashedaran, Comparative Price Advertising: Believe it 
or Not, 36 J. of Consumer Aff. 287-88 (2002); Valarie A. Zeithaml, 
Consumer Perceptions of Price, Quality, and Value: A Means-End Model 
and Synthesis of Evidence, 52 J. of Marketing 2-3 (1988).
    \115\ Blair, Harris and Monroe, supra note 114, at 76.
    \116\ Truth in Lending imposes requirements for ads that mention 
specific credit terms. 12 C.F.R.  226.24 (2006).
    \117\ Cal. Bus. & Prof. Code  17538.9(b)(1) (West 2006).
    \118\ States require disclosures on the card itself. See e.g., Cal 
Bus. & Prof. Code  17538.9(b)(2)(A) (West 2006). Some states require 
other disclosures on the card or its packaging. See e.g., Id.  
17538.9(b)(3).
    \119\ Cal. Bus. & Prof. Code  17538.9(b)(2)(A) (West 2006). 
California law defines ``company'' as ``an entity providing prepaid 
calling services to the public using its own or a resold 
telecommunications network.'' Cal. Bus. & Prof. Code at  17538.9(a)(1) 
(West 2006). Other states that require the name of the company on the 
card include the following: Alaska, see Alaska Admin. Code tit. 3,  
52.377(d)(1)(A) (2006); Alabama, see Al. Pub. Serv. Comm'n Rule. T-18.1 
(1997); Florida, see Fla. Admin. Code Ann. r. 25-24.920(1)(a) (2006); 
Illinois, see 815 Ill. Comp. Stat. 505/2QQ(d)(1)(A) (2006); Missouri, 
see Mo. Code Regs. Ann. tit. 4,  240-32.150(2) (2006); New York, see 
N.Y. Pub. Serv. Law  92-f(2)(a) (McKinney 2006); Texas, see 16 Tex. 
Admin. Code  26.34(f)(1)(B)(ii) (2000); and Washington, see Wash. 
Admin. Code 480-120-264(5)(a)(ii) (2006).
    \120\ Cal. Bus. & Prof. Code  17538.9(b)(2)(B) (West 2006); Fla. 
Admin. Code Ann. r. 25-24.920(1)(b) (2006); Ill. Comp. Stat. 815 505/2 
QQ(d)(1)(B) (2006); Mo. Code Regs. Ann. tit. 4,  240-32.160(2)(B) 
(2006); N.Y. Pub. Serv. Law  92-f(2)(b) (McKinney 2006); 16 Tex. 
Admin. Code  26.34(f)(1)(A)(i) (2000).
    \121\ Marlowe and Rojo, supra note 9, at 134-35; Marlowe, supra 
note 9, at 9.
    \122\ Cal. Bus. & Prof. Code  17538.9(b)(3)(C) (West 2006); Fla. 
Admin. Code Ann. r. 25-24.920(1)(c) (2006); 815 Ill. Comp. Stat. 505/2 
QQ(d)(1)(C) (2006); Mo. Code Regs. Ann. tit. 4,  240-32.160(2)(C) 
(2006); N.Y. Pub. Serv. Law  92-f(2)(c) (McKinney 2006).
    \123\ Cal. Bus. & Prof. Code  17538.9(b)(2)(D) (West 2006); Fla. 
Admin. Code Ann. r. 25-24.920(1)(d); Mo. Code Regs. Ann. tit. 4,  240-
32.160(2)(D) (2006); N.Y. Pub. Serv. Law  92-f(2)(d) (McKinney 2006).
    \124\ The situation is analogous to the person who issues a check 
drawn on an account that doesn't exist or that contains no funds, 
providing the payee with an action in deceit. See Greenfield, supra 
note 75, at 12.
    \125\ Cal. Bus. & Prof. Code  17538.9(b)(3)(I) (West 2006); Fla. 
Admin. Code Ann. r. 25-24.920(2)(c) (2006); 815 Ill. Comp. Stat.  505/
2 QQ (d)(2)(F) (2006); Mo. Code Regs. Ann. tit. 4,  240-32.160(1)(C) 
(2006); N.Y. Pub. Serv. Law  92-f(2)(e) (McKinney 2006); 16 Tex. 
Admin. Code  26.34(f)(1)(B)(iv) (2000); Wash. Admin. Code 480-120-
264(5)(a)(v) (2006).
    \126\ Cal. Bus. & Prof. Code  17538.9(b)(8) (2006); Fla. Admin. 
Code Ann. r. 25-24.920(7) (2006); Mo. Code Regs. Ann. tit. 4,  240-
32.170(8) (2006); N.Y. Pub. Serv. Law  92-f(6) (McKinney 2006).
    \127\ Wash. Admin. Code 480-120-264(5)(a)(v) (2006). Texas has the 
same policy; if the expiration date or policy is not disclosed, on the 
card, it is considered active ``indefinitely.'' 16 Tex. Admin. Code  
26.34(f)(1)(B)(iv) (2000).
    \128\ Cal. Bus. & Prof. Code  17538.9(b)(3) (West 2006).
    \129\ Id.
    \130\ Fla. Admin. Code Ann. r. 25-24.920(2) (2006).
    \131\ Cal. Bus. & Prof. Code  17538.9(b)(3) (West 2006).
    \132\ Fees include ``monthly or other periodic fees, maintenance 
fees, per-call access fees, surcharges for calls made on pay 
telephones, or surcharges for the first minute or other period of use. 
. . .'' Id.  17538.9(b)(3)(A).
    \133\ Id.  17538.9(b)(3)(B).
    \134\ Id. Illinois' and New York's requirements on disclosure of 
fees are similar. 815 Ill. Comp. Stat.  505/2QQ(d)(2) (2005); N.Y. 
Pub. Serv. Law  92-f(3) (McKinney 2006).
    \135\ 12 C.F.R.  22612 (1994) (regarding credit cards); 12 C.F.R. 
 205.4 (2001) (regarding debit cards).
    \136\ Cal. Bus. & Prof. Code  17538.9(b)(13) (West 2006).
    \137\ Id.
    \138\ Id.
    \139\ Id.
    \140\ 16 Tex. Admin. Code  26.34(g)(1) (2000).
    \141\ Id.
    \142\ Id.  26.34(g)(2) (2000).
    \143\ Cal. Bus. & Prof. Code  17538.9(b)(4) (West 2006).
    \144\ Id.
    \145\ Id.
    \146\ 16 Tex. Admin. Code  26.34(f)(1) (2000).
    \147\ Id.
    \148\ See U.C.C.  4-406 (2002) (requiring customers to report 
check forgeries and alterations to the bank, and if timely reported the 
non-negligent customer is not liable, but the UCC does not require any 
dispute resolution procedure. If the bank refuses to investigate the 
customer's claim and recredit the customer's account, the customer's 
only recourse is to sue. The bank's refusal to investigate and recredit 
does not violate the UCC).
    \149\ 12 C.F.R.  226.13 (1994) (regarding credit cards); 12 C.F.R. 
 205.11 (2001) (regarding debit cards).
    \150\ Id.
    \151\ Budnitz and Saunders, supra note 81, at 178-79.
    \152\ Id.
    \153\ Marlowe and Rojo, supra note 9, at 130-31.
    \154\ Cal. Bus. & Prof. Code  17538.9(b)(6) (West 2006); N.Y. Pub. 
Serv. Law  92-f(4) (McKinney 2000).
    \155\ See, e.g., Al. Pub. Serv. Comm'n Rule T-18.1(5) (2000) 
(requiring that customer service be manned 8 hours per day, 5 days per 
week); Fla. Admin. Code Ann. r. 25-24.920(4) (2006) (requiring live 
operator 24/7 or electronically recorded and attempt to contact the 
next business day); Mo. Code Regs. Ann. tit. 4,  240-32.140(4) (2001) 
(requiring availability 24/7); 16 Tex. Admin. Code  26.34(i) (2000) 
(requiring live operator 24/7 or electronically recorded and attempt to 
contact the next business day); Wash. Admin. Code 480-120-264(2)(a) 
(2003) (requiring ability to respond 24/7).
    \156\ Cal. Bus. & Prof. Code  17538.9(b)(6)(B) (West 2006); N.Y. 
Pub. Serv. Law  92-f(4) (McKinney 2006).
    \157\ N.Y. Pub. Serv. Law  92-f(4) (McKinney 2006). New York also 
requires that the operator be able to provide information about the 
``terms and conditions of service and monthly service charges.'' Id.  
92-f (4)(iv).
    \158\ Fla. Admin. Code Ann. r. 25-24.920(9) (2006); Cal. Bus. & 
Prof. Code  17538.9(b)(7) (West 2006); N.Y. Pub. Serv. Law  92-f(5) 
(McKinney 2006).
    \159\ Fla. Admin. Code Ann. r. 25-24.920(9) (2006).
    \160\ Cal. Bus. & Prof. Code  17538.9(b)(7) (West 2006); N.Y. Pub. 
Serv. Law  92-f(5) (McKinney 2006).
    \161\ Id.
    \162\ Id.
    \163\ Fla. Admin. Code Ann. r. 25-24.925(1)(a) (2006).
    \164\ Mo. Code Regs. Ann. tit. 4,  240-32-170(5)(B) (2006).
    \165\ Id.  240-32-170(6)(A).
    \166\ Al. Pub. Serv. Comm'n Rule T-18.1(4) (1998).
    \167\ 16 Tex. Admin. Code  26.34(j) (2000).
    \168\ Fla. Admin. Code Ann. r. 25-24.925(1)(a).
    \169\ Id.; see also Mo. Code Regs. Ann. tit. 4,  240-32.170(6) 
(2006) (requiring a company to refund the unused value remaining on the 
card if the ``company is no longer able to provide service.'')
    \170\ Fla. Admin. Code Ann. r. 25-24.925(1)(a) (2006). The company 
can choose whether to make the refund in cash or by means of a 
replacement service. It must be provided within 60 days of when the 
consumer notifies the company. Id. r. 25-24.925(1)(b).
    \171\ Alaska Admin. Code tit. 3,  52.377(e) (2006).
    \172\ Id.
    \173\ Fla. Admin. Code Ann. r. 25-24.925(2) (2006). Compare the 
rules for lost and stolen credit cards. Under Federal law, a consumer 
has a maximum liability of $50. The liability will be less if the 
consumer notifies the card issuer before the thief charges less than 
$50 prior to the consumer providing the notification. 12 C.F.R.  
226.12(b) (2006).
    \174\ Cal. Bus. & Prof. Code  17538.9(b)(7) (West 2006); Fla. 
Admin. Code Ann. r. 25-24.925(1)(a) (2006); Mo. Code Regs. Ann. tit. 4, 
 240-32.170(6)(A) (2006); N.Y. Pub. Serv. Law  92-f(5) (McKinney 
2006).
    \175\ Id.
    \176\ Credit card law provides a limited remedy if there is a 
failure in the goods or services purchased. Consumers can dispute the 
charges and refuse to pay for those goods or services. 12 C.F.R.  
226.12(c) (2006). The card issuer will charge the amount back to the 
merchant and leave the consumer and merchant to resolve the dispute on 
their own. Budnitz & Saunders, supra note 81, at 152. Debit card law 
does not provide any remedy. Id. at 82.
    \177\ In regard to the sale of goods, the Uniform Commercial Code 
includes rules on express and implied warranties, but a merchant can 
avoid these by disclaiming them in the contract between the parties. 
U.C.C.  2-316 (2003). The Federal Magnuson-Moss Warranty Act provides 
limited protection. 15 U.S.C.  2301-2312 (2006). The warranty laws 
regarding the provision of services are even more problematic. See 
infra at Part IX.
    \178\ Cal. Bus. & Prof. Code  17538.9(b)(10) (West 2006).
    \179\ Id.  17538.9(b)(7).
    \180\ Many laws require parties to act in a commercially reasonable 
manner. See, e.g., U.C.C.  3-103(a)(6)-(9) (2002), 9-607(c), 9-
608(a)(3), 9-610 (2000).
    \181\ Fla. Admin. Code Ann. r. 25-24.930 (repealed 2005).
    \182\ Cal. Bus. & Prof. Code  17538.9(b)(8) (West 2006); N.Y. Pub. 
Serv. Law  92-f(6) (McKinney 2006).
    \183\ N.Y. Pub. Serv. Law  92-f(6) (McKinney 2006).
    \184\ Id.
    \185\ See generally Borowski v. Firstar Bank Milwaukee, 579 N.W.2d 
247 (Wis. Ct. App. 1998) (upholding a bank's contract requiring a 
customer to notify the bank of any unauthorized signature or alteration 
of a check within 14 days as reasonable, and rejecting the dissent's 
view that such a short time period was contrary to customers' 
reasonable expectations and conduct).
    \186\ Greenfield, supra note 75, at 160 (describing how legislation 
prohibiting deceptive practices has been enacted in every state). See 
also, id. at 559 (most states have prohibited unfair practices).
    \187\ See, e.g., Taylor v. Jacques, 292 B.R. 434, 434 (Bankr. N.D. 
Ga. 2002)(holding that consumer cannot sue under Georgia's Fair 
Business Practices Act if the industry is regulated, even if the 
regulations do not address the problem the consumer alleges violates 
the Act). Consumers also face formidable barriers to obtaining judicial 
relief if a company stops doing business. Alternatively the company may 
stop doing business in one state, then resume business in another state 
under a different name. See generally, Pickel, supra note 7 (reporting 
that companies lose consumer loyalty with their unfair and deceptive 
practices, but then market the cards with a new brand name, cheating 
consumers who do not realize it is the same company).
    \188\ 16 Tex. Admin. Code  26.34(m) (2000) (explaining that the 
commission can order the company to take corrective action, impose 
administrative penalties, and coordinate with the Office of the 
Attorney General).
    \189\ Once a seller makes an express warranty, it cannot disclaim 
that warranty. U.C.C.  2-316(1) (2003). However, the seller is not 
required to make any express warranties. Certain implied warranties 
arise by operation of law, U.C.C.  2-314 & 2-315 (2003), but the 
seller can easily disclaim these. U.C.C.  2-316(2) & (3) (2003).
    \190\ 15 U.S.C.  2308(a) (2006).
    \191\ 16 C.F.R.  700.1(h) (2006). Even if the Act did apply, the 
Act prohibits only the disclaimer of implied warranties that are 
created by state law; the Act itself does not create any implied 
warranties.
    \192\ ``. . . [A] duty is implied in every service, repair or 
construction contract to perform it skillfully, carefully, diligently, 
and in a workmanlike manner.'' Alco Standard Corp. v. Westinghouse 
Elec. Corp., 206 Ga. App. 794, 796, 426 S.E.2d 648, 650 (Ga. Ct. App. 
1992).
    \193\ Id.
    \194\ No cases were found addressing this issue, but since the UCC 
permits disclaimers of implied warranties for the sale of goods, 
presumably courts also would allow it for the sale of services. See 
generally Richard M. Alderman, Warranty Disclaimers and the Texas 
Deceptive Practices Act, 29 Hous. Law. 14, 15 (Jan./Feb. 1992) 
(discussing express warranty disclaimers in service contracts).
    \195\ See Budnitz and Saunders, supra note 81, at 177-178.
    \196\ Id.
    \197\ Id.
    \198\ Id.
    \199\ See Fla. Admin. Code Ann. r. 25-24.925(2) (providing that a 
company ``may, but shall not be required to, provide a refund'' for 
lost or stolen phone cards). Compare credit card and debit card law 
that imposes specific caps that limit the consumer's liability if a 
thief makes charges on a lost or stolen card. 15 U.S.C.  1643(a) 
(2006) (credit cards); Id.  1693(g) (debit cards and other electronic 
fund transfers).
    \200\ See Cheryl Johnson, Faux Williams makes rounds; Star 
impersonator leaves trail of angry victims, Star Trib., Dec. 26, 2004 
(reporting consumer's allegations of unauthorized use of phone card 
after he lost the piece of paper on which he had written his PIN).
    \201\ Id.
    \202\ The card issuer may be required to transfer those funds to 
the state under abandoned property or escheat laws. Christopher B. 
Woods, Stored Value Cards, 59 Consumer Fin. L. Q. Rep. 211, 219 (2005); 
Anita Ramasastry, State Escheat Statutes and Possible Treatment of 
Stored Value, Electronic Currency, and Other New Payment Mechanisms, 57 
Bus. Law. 475, 480-81 (2001) (stating that North Carolina and Arizona 
exclude prepaid phone cards from their escheat laws). Even where those 
laws apply to prepaid phone balances, the seller has the use of those 
funds until they are paid to the state.
    \203\ Marlowe & Rojo, supra note 9, at 130.
    \204\ Luna, supra note 18 (highlighting an instance where a 
consumer reported that her card was cutoff immediately after making her 
first call, and the card did not work thereafter). The New York 
Attorney General persuaded eighteen retailers to agree to deactivate 
and reissue damaged gift cards. Big Retailers Agree to Replace Gift 
Cards, Detroit Free Press, Mar. 3, 2003.
    \205\ See http://www.ftc.gov/bcp/conline/pubs/products/buytime.htm; 
http://www.fcc.gov/cgb/consumerfacts/prepaidcards.html; see also Mark 
E. Budnitz, Stored Value Cards and the Consumer: The Need for 
Regulation, 46 Am. U. L. Rev. 1027, 1035, n. 54 (1997) (reporting that 
issuers of prepaid phone cards have gone out of business after selling 
tens of thousands of cards which thereafter became worthless).
    \206\ See Getting the Best Value from Prepaid Phone Cards, Consumer 
Action (April 1, 2001), available at http://www.consumeraction.org 
(last visited Oct. 5, 2006).
    \207\ Id.
    \208\ Budnitz and Saunders, supra note 81, at 172-173. See infra 
text accompanying note 200.
    \209\ See, e.g., the Electronic Fund Transfers Act, 15 U.S.C.  
1693(m) (2006) (providing actual damages, statutory damages, costs, and 
reasonable attorney's fees).
    \210\See infra Part VI.
    \211\ As discussed above, the FRB and FCC might be appropriate 
agencies as well. See supra text accompanying notes 89-94. The FTC, 
however, seems best suited. The FRB deals with financial institutions, 
and sellers of phone cards are not financial institutions. The FCC's 
focus is on the telecommunications industry, not on payment devices 
such as phone cards, or the types of problems consumers face when they 
use phone cards.
    \212\ As provided in other statutes, using the agency-approved form 
would be deemed compliance with the disclosure requirements. Electronic 
Fund Transfers Act, 15 U.S.C.  1693(m)(d)(2) (2006).
    \213\ See Electronic Fund Transfers Act, 15 U.S.C.  1693(q) (2006) 
The Act does not annul, alter, or affect state law except to the extent 
it is inconsistent with the Act. Furthermore, a state law is not 
inconsistent if it affords consumers greater protection than is 
provided in the Act.
    \214\ See supra text accompanying note 108. See also FTC v. Pt-1 
Commc'ns, Civ. Action # 99-1432 (S.D.N.Y. 1999) (stipulated final 
judgment and order for permanent injunction and consumer redress; 
permanent injunction in connection with phone card company's 
advertising). See also Hispanic Outreach Forum & Law Enforcement 
Workshop: A Summary of the Proceedings, supra note 82, at 9 (discussing 
how phone cards and other various types of media, excluding direct 
mail, are sources of deceptive claims targeted at Hispanics).
    \215\ Cal. Bus. & Prof. Code  17538.9(b)(1) (West 2006).
    \216\ See Federal Trade Commission, Facts for Business: DotCom 
Disclosures, available at http://www.ftc.gov/bcp/conline/pubs/buspubs/
dotcom (last visited May 31, 2006).
    \217\ See e.g., Boomer v. AT&T Corp., 309 F.3d 404 (7th. Cir. 2002) 
(holding that the consumer accepted a contract when using the service 
after he received agreement). See generally Ronald J. Mann, Panel One: 
Boilerplate In Consumer Contract: ``Contracting'' For Credit, 104 Mich. 
L. Rev. 899, 910 (2006) (discussing the credit card issuer's use of 
contract terms providing that notice and continued use bind consumers 
when issuers unilaterally change contract terms). As Howard Segermark, 
the Executive Director of the International Prepaid Communications 
Association, has commented regarding the special nature of phone card 
contracts, ``handing over a package--a phone card or prepaid cellular--
does not provide an opportunity for a formal contract.'' Segermark, 
supra note 100.
    \218\ 16 Tex. Admin. Code  26.34(f)(1)(B)(iv) (2006); Wash. Admin. 
Code  480-120-264(5)(a)(v).
    \219\ Cal. Bus. & Prof. Code  17538.9(b)(3) (West 2006).
    \220\ Examples of fees include ``monthly or other periodic fees, 
maintenance fees, per-call access fees, surcharges for calls made on 
pay telephones, or surcharges for the first minute or other period of 
use[.]'' Id.  17538.9(b)(3)(A).
    \221\ Id.; Illinois' and New York's requirements on disclosure of 
fees are similar. 815 Ill. Comp. Stat. 505/2QQ(d)(2) (2006); N.Y. Pub. 
Serv. Law  92-f(3) (McKinney 2006).
    \222\ 16 Tex. Admin. Code  26.34(g)(1) (2006).
    \223\ Id.  26.34(g)(2).
    \224\ See Budnitz and Saunders, supra note 81 at 172-73.
    \225\ Notification should not create technical problems. Texas 
requires sellers to inform consumers verbally when their balances are 
nearly exhausted. 16 Tex. Admin. Code  26.34(g)(2) (2006).
    \226\ See supra text accompanying notes 184-186 discussing the 
requirements for lost and stolen cards that the Federal statute should 
impose.
    \227\ See supra text accompanying notes 46-56.
    \228\ Marlowe, supra note 9, at 4.
    \229\ Id. at 4-5.
    \230\ Cal. Bus. & Prof. Code  17538.9(b)(4) (West 2006).
    \231\ Id.
    \232\ Alan M. White and Cathy Lesser Mansfield, Literacy and 
Contract, 13 Stan. L. & Pol'y Rev. 233, 264-65 (2002). ``. . . 
disclosure statements . . . may not be able to aid most consumers in 
understanding the terms of their agreement.'' Id. at 261.
    \233\ California and New York require live operators twenty-four 
hours a day and 7 days a week. Cal. Bus. & Prof. Code  
17538.9(b)(6)(A) (West 2006); N.Y. Pub. Serv. Law  92-f(4) (McKinney 
2006).
    \234\ See Fla. Admin. Code Ann. r.  25-24.920(4) (2006); Mo. Code 
Regs. Ann. tit. 4,  240-32.160(5) (2006), 16 Tex. Admin. Code  
26.34(i) (2000). Alabama requires that the number be manned 8 hours per 
day, 5 days per week. Al Pub. Serv. Comm'n Rule 18.1(5) (1997).
    \235\ Consumers in New York and California can file complaints with 
customer service. Cal. Bus. & Prof. Code  17538.9(b)(6)(C) (West 
2006); N.Y. Pub. Serv. Law  92-f(4) (McKinney 2006).
    \236\ This scheme is similar to that in the Electronic Fund 
Transfers Act, 15 U.S.C.  1693(f) (2006).
    \237\ N.Y. Pub. Serv. Law  92-f (4) (McKinney 2006). New York also 
requires that the operator be able to provide information about the 
``terms and conditions of service and monthly service charges.'' Id.  
92-f (4)(iv).
    \238\ Fla. Admin. Code Ann. r.  25-24.920(3)(c) (2006).
    \239\ Cal. Bus. & Prof Code  17538.9(b)(1) (2006); N.Y. Pub. Serv. 
Law  92-f (McKinney 2006).
    \240\ Cal. Bus. & Prof Code  17538.9(b)(7) (2006); N.Y. Pub. Serv. 
Law  92-f (McKinney 2006).
    \241\ Id. The Federal statute should allow the FTC to describe 
technical standards because the description requires a high level of 
technical expertise and specificity. Moreover, the standards may need 
to be adjusted as technology advances over time.
    \242\ Al. Pub. Serv. Comm'n Rule T-18.1(4)(1997).
    \243\ Fla. Admin. Code Ann. r.  25-24.925(1)(a) (2006). See also 
Mo. Code Regs. Ann. tit. 4,  240-32.170(6) (2006) (providing that a 
company must refund the unused value remaining on cards when the 
``company is no longer able to provide service'').
    \244\ Alaska Admin. Code tit. 3,  52.3771(e) (2006).
    \245\ Fla. Admin. Code Ann. r.  25-24.925(2) (2006) (permitting, 
but not requiring, a refund for lost or stolen cards).
    \246\ Cal. Bus & Prof. Code  17538.9(b)(7) (West 2006); N.Y. Pub. 
Serv. Law  92-f (McKinney 2006).
    \247\ Commercial reasonableness, failure to exercise ordinary care, 
good faith, and unconscionability are all standards included in the 
Uniform Commercial Code. Consequently, including them in the proposed 
statute is not a novel approach. See U.C.C.  3-103(a)(6) & (9) 
(2002); U.C.C.  2-302 (2003); U.C.C.  9-610(b) (2000).
    \248\ Cal. Bus. & Prof. Code  17538.9 (b)(7) (West 2006).
    \249\ Fla. Admin. Code Ann. r.  25-24.930 (repealed 2005).
    \250\ U.C.C.  2-314 (2003).
    \251\ Id.  2-316 (2003) (allowing sellers to disclaim implied 
warranties). See, e.g., Md. Code Ann., Com. Law  2-316.1 (West 2006) 
(illustrating that some states prohibit sellers from disclaiming 
implied warranties in consumer transactions).
    \252\ See Budnitz and Saunders, supra note 81, at 7.7.1.
    \253\ David Wood, Tips on Using Prepaid Phone Cards, Military Money 
Mag., available at http://www.militarymoney.com/lifestyle/1065704890 
(last visited Oct. 5, 2006).
    \254\ Examples of defects include access numbers or PINs that do 
not work and other defects making it impossible for the card to operate 
as it should. A lost PIN may never be found. In that situation the 
consumer has paid money for the card and the seller never has to 
provide any more value. The card issuer may be required to transfer 
those funds to the state under abandoned property or escheat laws. Even 
where those laws apply to prepaid phone balances, the seller has the 
use of those funds until they are paid to the state. See Luna, supra 
note 18; Big Retailers Agree to Replace Gift Cards, supra, note 204.
    \255\ The statute should delegate to the FTC the authority to study 
the actual costs to sellers of replacing cards in order to establish 
more specific guidelines for what would constitute a reasonable fee.
    \256\ E.g., Electronic Fund Transfers Act, 15 U.S.C.  1693 (2006).
    \257\ A comprehensive critique of mandatory predispute arbitration 
in phone card contracts is beyond the scope of this article. See 
Symposium, Mandatory Arbitration, 67 Law & Contemp. Probs. 1 (2004) 
(showing that mandatory arbitration agreements are a substantial 
barrier to consumers' ability to obtain meaningful relief).
    \258\ 16 Tex. Admin. Code  26.34(e)(4) (2000) (requiring that 
prepaid calling card service companies register with the Public Service 
Commission).

                                  
