On December 2, 2016, the FCC released a Notice of Apparent Liability (“NAL”) alleging that NECC Telecom, Inc. (“NECC”) failed to timely pay regulatory fees, imposed excessive Universal Service Fund (“USF”) surcharges on its international long distance customers and transferred control over its authorizations to provide international and domestic telecommunications service without prior FCC approval.  The FCC proposed a total forfeiture of $392,930.

Background.  NECCis a reseller of international long distance and domestic toll service and holds FCC Section 214 authorizations to provide (i) international long distance service as a reseller and as a facility based provider and (ii) domestic telephone service. 

In 2012, NECC qualified for the Limited International Revenue Exemption, exempting the company from contributing to the USF based on its international service revenues.  However, NECC continued to bill customers for USF surcharges based on its international service revenues.  After reviewing NECC’s revenues reported on its 2013 Form 499A, the Universal Service Administration Corporation (“USAC”) requested further documentation.  NECC initially responded with a sampling of invoices but failed to respond to follow-up questions concerning the collection of USF surcharges, leading USAC to refer NECC to the FCC for potential enforcement action in June 2015.

In November 2015, the FCC’s Enforcement Bureau initiated its investigation by issuing a Letter of Inquiry to NECC.  NECC and the FCC traded responses through February 2016.

Notice of Apparent Liability.  After completing its investigation, the Enforcement Bureau concluded that NECC apparently willfully and repeatedly:

• Violated FCC rules by imposing excessive USF surcharges on customers when USF contributions on the revenue was not owed;
• Failed to fully pay FCC regulatory fees on its telecommunications services; and
• Failed to obtain FCC approval prior to transferring substantial control of its 214 authorizations as required by the Communications Act and FCC rules.

In issuing the NAL, the Enforcement Bureau noted that NECC had continued to charge customers a USF surcharge on international long distance revenue while NECC was exempt from having to make contributions on such revenue, thus profiting from the overcharges to its customers disguised as USF surcharges.  Specifically, the Enforcement Bureau examined three customer invoices from December 2015 and found each to contain surcharges.  Moreover, the Enforcement Bureau found that NECC failed to report the revenue from the surcharges on its 2015 Form 499A.

The Enforcement Bureau also noted that NECC failed to timely pay regulatory fees for fiscal years 2008, 2011 and 2016.  As an interstate and international telecommunications service provider, NECC is obligated to pay regulatory fees based on its interstate and international end-user revenues. 

Finally, the Enforcement Bureau concluded that NECC failed to seek prior FCC approval before transferring two Section 214 authorizations.  FCC rules require applicants to obtain prior approval before any “substantial” transfer of control of a carrier’s lines or its 214 authorizations.  The Enforcement Bureau noted that the sole shareholder in NECC transferred 51% of the outstanding stock as part of a divorce decree in 2010.  Control was then transferred again in 2015 through a stock transaction, returning majority stock ownership to the original shareholder.  The FCC thus found that there were two separate transfers, each involving the two authorizations, for a total of four violations.

Calculation of Forfeiture Amount.  In addressing the forfeiture amount, the Enforcement Bureau specifically stated that NECC’s carelessness in its customer billing practices resulting in the overcharges was a serious violation which merited a significant forfeiture penalty.   The Enforcement Bureau further noted that the excessive USF surcharges was similar to when telecommunications carriers impose misleading line items or place unauthorized charges on customer bills, a violation for which the FCC has assessed a base forfeiture of $40,000 per violation.  Based on the fact that the Enforcement Bureau reviewed three customer invoices that contained the surcharge, the Enforcement Bureau found that a total forfeiture of $120,000 for these violations was warranted. 

In addressing NECC’s failure to file regulatory fees, the Enforcement Bureau noted that a carrier’s failure to contribute toward the costs of the FCC’s regulatory activities from which the carrier benefits undermines the efficiency, equitability and effectiveness of the regulatory fee program and unfairly forces the funding burden upon other, compliant service providers.  The Enforcement Bureau found that NECC’s repeated failure to satisfy its fee payment obligations over the course of eight years resulted in a regulatory fee delinquency of $80,309.88, and trebled the amount owed as a penalty for failing to timely pay.  This totaled a $240,930 forfeiture. 

Finally, regarding NECC’s unauthorized transfer of its Section 214 authorizations, the Enforcement Bureau noted that the base forfeiture amount per transfer is $8,000.  Multiplied by the four unauthorized transfers, this resulted in a proposed fine of $32,000.   

Added together, the total forfeiture proposed in the NAL added up to $392,930.

Takeaways.  This case illustrates the fact that once the FCC’s Enforcement Bureau begins an investigation in one area, it is likely to also examine other related areas of potential non-compliance. 

• The proposed forfeiture underscores the importance the FCC places on assuring that billing practices are correct, not misleading and that customers are not overcharged.  This is the latest in a series of FCC enforcement actions targeting what the agency believes are deceptive billing practices. 
• The importance of timely paying annual regulatory fees is similarly demonstrated by the FCC’s decision to treble the amount owed in fees as a forfeiture amount. 
• Finally, carriers need to pay attention to changes in control that could result in a need for prior FCC approval of FCC authorizations held be the company. 

If you have any questions regarding the NECC NAL, USF surcharges, regulatory fee obligations or ownership transfers, please contact Bruce Beard at bbeard@cinnamonmueller.com or (314) 394-1535. 

Signal Leakage Reports Due by December 31, 2016 

If your system uses aeronautical frequencies, you must conduct signal leakage measurements and file FCC Form 320 at least once each calendar year.  The form should be filed within 45 days of testing so that the most current CLI information is on record with the FCC.  In the past, the FCC has fined cable operators for violating the signal leakage rules, even when a third party caused the signal leakage. 

FCC Form 320 must be filed electronically through the FCC’s Cable Operations and Licensing System (COALS).  To access COALS, go to https://apps.fcc.gov/coals/.  

If you have questions about FCC Form 320, please contact Scott Friedman at (312) 372-3930 or sfriedman@cinnamonmueller.com.