Pay-per-Call Rule

FEDERAL TRADE COMMISSION

16 CFR Part 308

Pay-per-Call Rule

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: In this document, the Federal Trade Commission (the

``Commission'' or ``FTC'') issues a Notice of Proposed Rulemaking to

amend the Commission's Trade Regulation Rule Pursuant to the Telephone

Disclosure and Dispute Resolution Act of 1992 (the ``900-Number Rule,''

``Rule,'' or ``original Rule''), 16 CFR Part 308, and requests public

comment on the proposed changes. The 900-Number Rule governs the

advertising and operation of pay-per-call services, and establishes

billing dispute procedures for those services as well as for other

telephone-billed purchases.

This document invites written comments on all issues raised by the

proposed changes and, specifically, on the questions set forth in

Section I of this Notice. This document also contains an invitation to

participate in a public workshop to be held following the close of the

comment period, to afford the Commission staff and interested parties

an opportunity to explore and discuss issues raised during the comment

period.

DATES: Written comments will be accepted until January 8, 1999.

Notification of interest in participating in the public workshop also

must be submitted on or before January 8, 1999. The public workshop

will be held on February 25 and 26, 1999, from 9:00 a.m. until 5:00

p.m.

ADDRESSES: Six paper copies of each written comment should be submitted

to the Office of the Secretary, Room 159, Federal Trade Commission, 6th

Street and Pennsylvania Avenue, N.W., Washington, DC 20580. To

encourage prompt and efficient review and dissemination of the comments

to the public, all comments should also be submitted, if possible, in

electronic form, on either a 5\1/4\ or a 3\1/2\ inch computer disk,

with a label on the disk stating the name of the commenter and the name

and version of the word processing program used to create the document.

(Programs based on DOS are preferred. Files from other operating

systems should be submitted in ASCII text format to be accepted.)

Individual members of the public filing comments need not submit

multiple copies or comments in electronic form. Comments should be

identified as ``Pay-Per-Call Rule Review--Comment. FTC File No.

R611016.''

Notification of interest in participating in the public workshop

should be submitted in writing, separately from written comments, to

Carole Danielson, Division of Marketing Practices, Federal Trade

Commission, 6th Street and Pennsylvania Avenue, N.W., Washington, DC

20580. The public workshop will be held at the Federal Trade

Commission, 6th Street and Pennsylvania Avenue, N.W., Washington, DC

20580.

FOR FURTHER INFORMATION CONTACT: Adam Cohn, (202) 326-3411, Marianne

Schwanke, (202) 326-3165, or Carole Danielson, (202) 326-3115, Division

of Marketing Practices, Bureau of Consumer Protection, Federal Trade

Commission, Washington, DC 20580.

SUPPLEMENTARY INFORMATION:

Section A. Background

1. Telephone Disclosure and Dispute Resolution Act of 1992 (``TDDRA'')

Congress enacted the Telephone Disclosure and Dispute Resolution

Act of 1992 (``TDDRA''), 15 U.S.C. 5701 et seq., to curtail the unfair

and deceptive practices engaged in by some pay-per-call businesses and

to encourage the growth of the legitimate pay-per-call industry.\1\

Title I of TDDRA directed the Federal Communications Commission

(``FCC'') to adopt regulations defining the obligations of common

carriers in connection with providing tariffed common carrier services

to pay-per-call services.\2\ Title I also set forth the original

definition of ``pay-per-call services,'' which limited the term to

certain specified services accessed through the use of a 900 telephone

number.\3\

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\1\ This statement summarizes Congress' findings regarding the

pay-per-call industry at the time it passed the legislation. For

greater detail concerning the problems Congress found to be

associated with pay-per-call services, see 15 U.S.C. 5701(b).

\2\ Title I is codified at 47 U.S.C. 228. The FCC published its

Notice of Proposed Rulemaking and Notice of Inquiry at 58 FR 14371

(March 17, 1993). The FCC's Rules are at 47 CFR 64.1501 et seq.

\3\ 47 U.S.C. 228(i)(1). See note 14, infra.

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Titles II and III of TDDRA required the FTC to prescribe

regulations governing various aspects of telephone-billed purchases,

including pay-per-call services.\4\ Title II of TDDRA directed the

Commission to enact regulations governing the advertising and operation

of pay-per-call services. Among other things, TDDRA specified that

certain disclosures appear in all advertising for pay-per-call programs

and in introductory messages (``preambles'') at the start of such pay-

per-call programs. Title II also prohibited pay-per-call providers from

engaging in certain practices, such as directing their services to

children under 12 years of age, or providing pay-per-call services

through an 800 number or other toll-free number. In addition, the

statute directed pay-per-call providers to comply with any additional

standards the Commission might prescribe to prevent abusive

practices.\5\

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\4\ Title II of TDDRA is codified at 15 U.S.C. 5711-5714. Title

III of TDDRA is codified at 15 U.S.C. 5721-5724.

\5\ 15 U.S.C. 5711(a)(2)(J).

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Title III of TDDRA required that the FTC's regulations establish

procedures for dispute resolution and for correcting billing errors in

connection with telephone-billed purchases.

Both Title II and Title III directed the Commission to include

provisions in its regulations that would prohibit acts or practices

that evade the rules or undermine the rights provided to consumers by

the statute.\6\ Notwithstanding Section 45(a)(2) of Title 15,\7\ TDDRA

granted the FTC jurisdiction over common carriers in connection with

their activities as service bureaus or pay-per-call providers, as well

as in connection with any billing and collection activities undertaken

on behalf of providers of pay-per-call services or other telephone-

billed purchases.\8\

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\6\ 15 U.S.C. 5711(a)(4) and 5721(a)(1).

\7\ Under that Section, ``common carriers subject to the Acts to

regulate commerce'' are exempted from FTC jurisdiction to prohibit

the use of ``unfair methods of competition in or affecting commerce

and unfair or deceptive acts or practices in or affecting

commerce.''

\8\ 15 U.S.C. 5711(c) and 5721(c). The term ``telephone-billed

purchase,'' as used in TDDRA, refers to a purchase of goods or

services (other than telephone toll services) that is ``completed

solely as a consequence of completion of the call or a subsequent

dialing, touch tone entry, or comparable action of the caller.'' 15

U.S.C. 5724(1). The term includes all pay-per-call services.

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2. 900-Number Rule

On July 26, 1993, the FTC adopted its 900-Number Rule, 16 CFR Part

308; the Rule became effective on November 1, 1993.\9\ Pursuant to

TDDRA's requirements, the 900-Number Rule incorporated the definition

of ``pay-per-call services'' set out in Section 228 of the

Communications Act of 1934, thus limiting the applicability of the

advertising and operating standards of the Rule to services accessed by

dialing a 900 number.\10\ Among other provisions, the Rule requires

that advertisements for pay-per-call services contain certain

disclosures of material

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information, including the cost of the call. This material information

must also be included in an introductory message (preamble) at the

beginning of any pay-per-call program where the cost of the call could

exceed two dollars. The Rule requires that anyone who calls a pay-per-

call service must be given the opportunity to hang up at the conclusion

of the preamble without incurring any charge for the call. In addition,

the Rule requires that all preambles to pay-per-call services state

that individuals under the age of 18 must have the permission of a

parent or guardian to complete the call.

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\9\ The Statement of Basis and Purpose and Final Rule were

published at 58 FR 42364 (August 9, 1993).

\10\ See note 14, infra.

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The 900-Number Rule also establishes procedures for resolving

billing disputes for telephone-billed purchases, such as pay-per-call

services.\11\ The Rule imposes certain obligations on entities that

bill and collect for telephone-billed purchases, such as investigating

and responding to billing disputes.\12\

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\11\ The term ``telephone-billed purchase'' is defined more

broadly than the term ``pay-per-call services,'' and thus includes

within its scope all pay-per-call services. See note 8, supra, and

discussion, infra, on the definition of ``telephone-billed

purchase.''

\12\ Other TDDRA protections were established by the FCC in that

agency's rules set out at 47 CFR 64.1501 et seq. Under the FCC

rules, a consumer's telephone service cannot be disconnected for

failure to pay charges for a 900-number call, and 900-number

blocking must be made available to consumers who do not wish to have

access to 900-number services from their telephone lines.

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3. Telecommunications Act of 1996 (``1996 Act'')

On February 8, 1996, the President signed into law the

Telecommunications Act of 1996 (the ``1996 Act'') \13\ to provide a

regulatory framework for telecommunications and information

technologies and services. Section 701(b) of the 1996 Act provides

that:

\13\ Pub. L. 104, 701, 110 Stat. 56 (1996) [codified at 47

U.S.C. 228 and at 15 U.S.C. 5714(1)].

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Section 204 of [TDDRA] is amended to read as follows:

(1) The term `pay-per-call services' has the meaning provided in

section 228(i) of the Communications Act of 1934,\14\ except that

the [Federal Trade] Commission by rule may, notwithstanding

subparagraphs (B) and (C) of Section 228(i)(1) of such Act, extend

such definition to other similar services providing audio

information or audio entertainment if the [Federal Trade] Commission

determines that such services are susceptible to the unfair and

deceptive practices that are prohibited by the rules prescribed

pursuant to section 201(a) [of TDDRA]. [Emphasis and footnote

added.]

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\14\ Section 228(i)(1) of the Communications Act of 1934, 47

U.S.C. 228(i)(1) provides that:

The term `pay-per-call services' means any service--

(A) in which any person provides or purports to provide--

(i) audio information or audio entertainment produced or

packaged by such person;

(ii) access to simultaneous voice conversation service; or

(iii) any service, including the provision of a product, the

charges for which are assessed on the basis of completion of the

call;

(B) for which the caller pays a per-call or per-time-interval

charge that is greater than, or in addition to, the charge for

transmission of the call; and

(C) which is accessed through use of a 900 telephone number or

other prefix or area code designated by the [Federal Communications]

Commission in accordance with subsection (b)(5) [47 U.S.C.

228(b)(5)].``

The 1996 Act thus authorizes the FTC, through its 900-Number Rule,

to extend the definition of the term ``pay-per-call services''--and, in

effect, the Rule's coverage--to include certain audiotext \15\ services

that may use a dialing prefix other than 900 \16\ and services for

which there is a charge that is greater than, or in addition to, the

charge for transmission of the call.\17\ If the FTC determines that

such audio information and entertainment services are susceptible to

the unfair and deceptive practices that are prohibited by its 900-

Number Rule, the FTC has the authority to define those services as

``pay-per-call services'' and require them to comply with the Rule's

provisions.

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\15\ The term ''audiotext`` describes audio information and

entertainment services offered through any dialing pattern,

including services accessed via 900 numbers as well as those

accessed through international and other non-900-number dialing

patterns.

\16\ 47 U.S.C. 228(i)(1)(C).

\17\ 47 U.S.C. 228(i)(1)(B).

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Section 701 of the 1996 Act also modified several provisions in

Title I of TDDRA, directing the FCC to amend its regulations regarding

pay-per-call services.\18\ The FCC took action to implement this

statutory mandate in July 1996.\19\ In that proceeding, the FCC also

proposed certain other modifications to its rules not expressly

mandated by statute in an attempt to reduce fraudulent practices in the

audiotext industry.

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\18\ Congress changed the definition of ''pay-per-call

services`` as it applies to the FCC's regulations under Title I of

TDDRA by deleting the exception for ''tariffed services,`` without

authorizing either the FTC or the FCC to further modify the Title I

definition in any way. The FTC's authority to change the definition

only impacts Titles II and III of TDDRA. Thus, the FTC's proposed

definition of ``pay-per-call services'' will only apply to this Rule

and not to any regulations promulgated by the FCC pursuant to Title

I of TDDRA.

\19\ Policies and Rules Governing Interstate Pay-Per-Call and

Other Information Services Pursuant to the Telecommunications Act of

1996, Order and Notice of Proposed Rulemaking, CC Docket No. 96-146,

11 FCC Rcd 14738 (1996) (``FCC Pay-Per-Call Order and Notice'').

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4. Initiation of Rule Review and Request for Comment

The 900-Number Rule provides that the Commission initiate a

rulemaking review proceeding to evaluate the Rule's operation no later

than four years after its effective date of November 1, 1993.\20\ The

Commission decided to conduct this review in conjunction with a Request

for Comment to obtain information on whether, pursuant to Section 701

of the 1996 Act, the definition of ``pay-per-call services'' should be

extended to cover audiotext services that fall outside the original

definition. Thus, on March 12, 1997, the Commission published a notice

in the Federal Register seeking comment on the overall effectiveness of

the Rule and on whether the Commission should extend the definition of

``pay-per-call services'' to include a broader array of audio

information and audio entertainment services provided through the

telephone.\21\

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\20\ 16 CFR 308.9.

\21\ 62 FR 11749 (March 12, 1997).

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Written and oral comment. In response to the notice, the Commission

received 34 comments from industry, law enforcement, and consumer

representatives, as well as from individual consumers.\22\ Virtually

all of the commenters praised the effectiveness of the 900-Number Rule

in combating the deceptive and unfair practices that had plagued the

900-number industry before the Rule was promulgated. They also strongly

supported the Rule's continuing role as the centerpiece in the effort

to implement TDDRA's goals of protecting consumers and promoting the

growth of the pay-per-call industry. As will be discussed in more

detail infra, a number of commenters suggested modifications they

believed would enhance the consumer protections offered by the Rule and

reduce some of the burden on industry. In addition, the majority of

commenters strongly urged the Commission to extend the Rule's

definition of ``pay-per-call services'' to cover audio information and

audio entertainment services provided by international direct dialing

and by other non-900-number dialing patterns. Many commenters also

supported additional restrictions on telephone-billed purchases that

result in monthly or other recurring charges on consumers' telephone

bills.

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\22\ A list of the commenters, and the acronyms that will be

used to identify each commenter in this notice, is appended as

Attachment A.

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On June 19 and 20, 1997, staff of the Commission conducted a public

workshop at the Federal Trade

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Commission in Washington, DC. Fourteen associations, individual

businesses, consumer organizations, and law enforcement agencies, each

with an affected interest and ability to represent others with similar

interests, were selected to engage in the roundtable discussion.\23\

The participants were encouraged to address each other's comments and

questions, and were asked to respond to questions from Commission

staff. The workshop was open to the public; oral comments from the

public were invited and several individuals spoke during the course of

the two-day workshop. The entire proceeding was transcribed and placed

on the public record.\24\ The public record to date, including the

comments that were submitted in electronic form and the workshop

transcript, has been placed on the Commission's web site on the

Internet.\25\

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\23\ The selected participants were: AT&T, FLORIDA, GORDON, ISA,

ITA, MCI, NAAG, NCL, SW, PILGRIM, PMAA, SNET, TPI, and TSIA.

Consumers Union also was selected as a participant, but was unable

to send a representative to the workshop.

\24\ References to the workshop transcript are cited as ``Tr.''

followed by the appropriate page designation. References to comments

are cited as ``[acronym of commenter] at [page number].''

\25\ The electronic portions of the public record can be found

at http://www.ftc.gov/ftc/consumer.htm. The full paper record is

available in Room 130 at the Federal Trade Commission, 6th Street

and Pennsylvania Avenue, N.W., Washington, DC 20580, telephone

number: 202-FTC-HELP (202-382-4357).

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Many commenters reported that the 900-Number Rule has been

successful in reducing the abuses that led to the passage of TDDRA \26\

and that, since the 900-Number Rule became effective, consumer

confidence has increased \27\ and complaints about 900-number services

have decreased dramatically.\28\ Commenters credited the 900-Number

Rule with these positive developments.\29\ Commenters generally agreed

that the Rule has been effective yet balanced, without unnecessarily

burdening the pay-per-call industry.\30\ Recognizing that the Rule

appears to have substantially reduced the abuses that had plagued the

900-number industry, commenters uniformly believe that it is important

to retain the Rule.\31\

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\26\ AARP at 1; AT&T at 2; FLORIDA at 4; GORDON at 1; ISA at 2;

NAAG at 2; NCL at 2; PMAA at 1-2; SNET at 2-3; TPI at 2; and TSIA at

2-3.

\27\ GORDON at 1; AT&T at 2; NAAG at 2; PMAA at 1-2; TPI at 2;

TSIA at 2-3. TSIA believes that the requirements established by the

FTC in its 900-Number Rule have benefitted consumers and enhanced

the fairness and credibility of the audiotext industry. TSIA at 2-3.

\28\ AT&T at 3; TPI at 2; AMERITECH at 2; GORDON at 1; FLORIDA

at 10; SW at 4; SNET at 2-3; NAAG at 2; NCL at 2; US WEST at 4-5

(noting a ``materially significant reduction'' in 900-number

complaints).

\29\ According to one representative comment, the 900-Number

Rule can be credited with ``eradicating abuses in the pay-per-call

industry'' and helping to make 900 numbers ``a viable marketing and

promotional tool for many legitimate marketers of consumer products

and services.'' PMAA at 1-2.

\30\ See, e.g., PMAA at 1-2, 4; NCL at 2; ISA at 2.

\31\ See, e.g., FLORIDA at 4; GORDON at 1; NCL at 2; PMAA at 4.

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Despite the success of the Rule in correcting the abuses in the

900-number industry, complaints about other types of audiotext services

(accessed via dialing patterns other than 900 numbers) continue to

flood into the offices of local exchange carriers, consumer groups, and

law enforcement agencies.\32\ The majority of complaints now involve

800 numbers, international numbers, or other dialing patterns that do

not use the 900-number prefix.\33\ Many consumer and law enforcement

agencies also have been receiving complaints from consumers who have

discovered unexplained monthly recurring charges on their telephone

bills for services that were never authorized, ordered, received, or

used.\34\

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\32\ After an initial decrease in the number of pay-per-call

complaints received by such organizations after the Rule became

effective, the numbers soon began to increase. Although pay-per-call

complaints dropped to 16th place in 1994 after the Rule became

effective, by 1996 they had climbed back to 12th place. NCL at 2.

\33\ ALLIANCE at 2-3; CINCINNATI at 1; FLORIDA at 4; NAAG at 1;

NCL at 2; SW at 2; SNET at 3-4. NCL states that, in 1996, it

received three times as many complaints about 800 numbers as it did

about 900 numbers. NCL at 2.

\34\ NCL at 3-4; SW at 3; Tr. at 382, 384, 498-504.

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Some commenters expressed the opinion that the effectiveness of the

900-Number Rule has led fraudulent operators to find alternate ways to

market their services in order to evade the Rule's protections.\35\

Conversely, some industry members argue that the high chargeback rates

experienced by services offered through 900 numbers have driven

providers to seek other methods of delivering their services and of

billing and collecting for them. In addition, these commenters point to

high transport rates charged by the interexchange carriers in the

United States as a reason for the development of alternate ways to

market and bill for audio information and entertainment services. Thus,

these audio information or entertainment providers allege that by using

non-900-number dialing patterns they can provide consumers with

services that are similar or comparable to those offered through 900

numbers, but cost consumers less.\36\ Consumer groups and law

enforcement responded to this argument by alleging that providers who

offer their services through dialing patterns other than the 900-number

exchange can charge less for their services precisely because the non-

900-number format enables providers to collect unauthorized and

illegitimate charges from consumers without fear of chargebacks,

because non-900 numbers do not provide the TDDRA protections to

consumers.\37\

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\35\ ALLIANCE at 2-3; FLORIDA at 4; NCL at 2; NAAG at 1; SW at

2; SNET at 3-4.

\36\ TSIA at 21.

\37\ Tr. at 367-68, 372-74, 380-81, 388-460.

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5. Notice of Proposed Rulemaking

Regardless of the factors that prompt providers to use alternatives

to the 900-number dialing pattern to bill for their audiotext services,

the question is whether these alternate billing methods undermine the

rights that Congress intended for consumers to have under TDDRA. In

TDDRA, Congress provided that consumers of audio information and

entertainment services should be protected from unfair and deceptive

practices and that they should have adequate rights of redress.\38\

Congress also realized that it could not anticipate all provisions that

might be necessary to prevent abusive practices. Therefore, TDDRA gave

the Commission the flexibility to prescribe ``such additional

standards'' as may be needed ``to prevent abusive practices.'' \39\ In

addition, in both Title II (advertising and pay-per-call standards) and

Title III (billing and collection), Congress directed the Commission to

include in its Rules provisions to ``prohibit unfair or deceptive acts

or practices that evade such rules or undermine the rights provided to

customers'' by the statute.\40\

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\38\ 15 U.S.C. 5701(a)(7).

\39\ 15 U.S.C. 5711(a)(2)(J).

\40\ 15 U.S.C. 5711(a)(4) and 5721(a)(1). In Title II, Congress

specifically directs the Commission to prohibit ``alternative

billing or other procedures'' which are unfair or deceptive or

undermine the rights provided to consumers under that Title. 15

U.S.C. 5711(a)(4).

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The record developed in this matter, as well as the Commission's

law enforcement experience, leave little doubt that many important

consumer protections provided by TDDRA have been eroded. The Commission

believes that the record supports the necessity of establishing

additional standards to ensure that consumers receive the protections

and rights that TDDRA intended. Accordingly, the Commission has

determined to retain its 900-Number Rule, but proposes to revise the

Rule. The Commission believes these revisions are necessary in order to

ensure that technological innovations in the telecommunications

industry do not undermine the rights of consumers or otherwise operate

to destroy the credibility and confidence that

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consumers and vendors have come to expect from the legitimate pay-per-

call industry.

By this document, the Commission is proposing revisions to its 900-

Number Rule. The proposed changes to the Rule are made pursuant to the

rule review requirements of the Rule,\41\ and pursuant to the authority

granted to the Commission by TDDRA to prevent abusive practices, to

prohibit practices that evade the Commission's rules or undermine the

rights of consumers, and to encourage the growth of the legitimate pay-

per-call industry.\42\ The proposed changes also are made pursuant to

the authority granted to the Commission by Section 701(b) of the

Telecommunications Act of 1996 Act to extend the definition of ``pay-

per-call services'' to cover similar audio information and

entertainment services that are susceptible to the unfair or deceptive

acts or practices prohibited by the 900-Number Rule. As discussed in

detail infra, the Commission believes the proposed modifications are

necessary to ensure that the Rule fulfills the Congressional mandate in

TDDRA that the FTC encourage the growth of the legitimate audiotext

industry, while curtailing those practices that are abusive, unfair or

deceptive, that evade the 900-Number Rule, or that undermine the rights

of consumers provided by TDDRA. The Commission believes that the

proposed modifications strike a balance between maximizing consumer

protections and minimizing the burden on the audiotext industry.

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\41\ 16 CFR 308.9.

\42\ 15 U.S.C. 5711(a)(2)(J), 5711(a)(4), and 5721(a)(1).

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Section B. Overview

1. Changes in the Marketplace

At the time the original Rule was promulgated, the only significant

example of a ``telephone-billed purchase'' was a purchase of audiotext

services over a 900 number. These services were (1) blockable under

Title I of TDDRA, (2) covered by the advertising restrictions and free

preamble disclosure requirements of Title II of TDDRA, and (3) fully

protected by the dispute resolution procedures of Title III of TDDRA.

In the years since promulgation of the Commission's 900-Number

Rule, the marketplace for telephone-billed purchases has changed in

several significant ways:

Proliferation of audiotext transactions that use dialing patterns

other than 900 numbers (such as international audiotext and audiotext

provided over toll-free numbers). The development of non-900-number

audiotext services raises consumer protection implications because: (1)

these transactions are not blockable in the manner contemplated by

Title I of TDDRA; (2) they are not subject to the advertising

requirements and preamble disclosure requirements provided by Title II

of TDDRA; and (3) in instances where the charge for the cost of the

information or entertainment is hidden within the cost of a toll call

(i.e., international audiotext),\43\ these transactions are not subject

to the dispute resolution mechanisms provided by Title III of TDDRA.

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\43\ International audiotext services are accessed by dialing

international telephone numbers. These services are beyond the

current scope of the Rule because they are not provided over 900

numbers, and because the resulting charges are not greater than or

in addition to the charge for transmission, a requirement for pay-

per-call services contained in the TDDRA definition. 47 U.S.C.

228(i). To receive payment for their services, international

audiotext operators enter revenue-sharing arrangements with foreign

telephone companies, and thus obtain a portion of the funds paid by

callers to the telephone companies for transmission of international

calls to the audiotext services.

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Emergence of a market for non-audiotext telephone-billed purchases

based on ANI. More recently, there has been a sharp rise in the

development of a market for non-audiotext telephone-billed purchases

that are in many cases not directly related to telecommunications

services or sold by common carriers. For example, consumers can now

purchase voice mail, Internet access, club memberships, and a host of

other services from vendors who charge the consumer's telephone bill,

often based solely on Automatic Number Identification (ANI).\44\ For

these non-audiotext transactions, the telephone is merely the

instrument of purchase, and the product or service may have little or

nothing to do with the telephone. Rather, the telephone becomes much

like a credit card data capture terminal, but without the security or

accompanying dispute resolution procedures and other consumer

protections afforded to consumers who make purchases with credit cards.

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\44\ Automatic Number Identification (``ANI'') is technology

similar to ``Caller-ID'' that permits the recipient of a telephone

call to identify (or ``capture'') the telephone number from which a

call is made.

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The use of the telephone bill to charge for services, products, and

memberships, even without the use of ANI. Consumers can sign up for a

service in person, and charge the service to a telephone number (their

own or someone else's), merely by filling in a phone number on a form.

This has resulted in two newer types of unauthorized charges: (1)

unauthorized charges billed to a telephone subscriber for a benefit

received by someone else, such as entering a sweepstakes to win a

prize; and (2) unauthorized charges to consumers who are unaware that

by filling out a form, they are deemed to have authorized a telephone-

billed purchase. These practices are a growing part of a larger problem

known as ``cramming''--the practice of placing unauthorized and

deceptive charges on consumers' telephone bills.

Emergence of a new type of service bureau providing critical

billing and collection functions. Service bureaus now provide much more

than the access to voice storage and telephone service that they

typically provided when the original Rule was promulgated. In the

current marketplace, a key function of service bureaus is to provide a

contractual framework for billing and collection. As the recent

Commission and State cramming cases have shown, some service bureaus,

known as ``billing aggregators'' (i.e., billing clearinghouses) act as

intermediaries between vendors and the local telephone companies

(``local exchange carriers'' or ``LECs''). These service bureaus

process their client-vendors' billing data into the electronic format

required by the LEC, contract with the LECs to have their client-

vendors' charges appear on line subscribers' telephone bills, and act

as conduits to the vendor for revenues collected by the LECs from

consumers for the vendors' services. In addition, service bureaus also

commonly structure revenue-sharing arrangements with foreign telephone

companies and provide services to bill consumers by direct mail.

Increase in the level of ``chargebacks'' for 900 numbers. Audiotext

vendors report difficulty collecting valid 900-number charges from

consumers. They report that, when LECs are unsuccessful in collecting

these legitimate charges, the vendors have great difficulty in

obtaining the information they need to collect the charges on their

own.

2. Summary of Proposed Major Changes to the Rule

Each of the changes in the marketplace described above has led to

the growth of deceptive and fraudulent practices in areas not

adequately addressed by the original Rule. The proposed Rule is

intended to address these deceptive or abusive practices by adapting

the Rule to respond to the changes in the marketplace in a manner

consistent with the original intent of Congress. Each of the proposed

changes is discussed in detail in this Notice. Additionally, Commission

staff has prepared an unofficial redlined version

[[Page 58528]]

of the proposed Rule, showing proposed additions and deletions, which

is available on the Commission's Internet site at www.ftc.gov. A

summary of the proposed major changes to the Rule is set forth below:

Coverage of Rule: The proposed revisions to the Rule would ensure

that TDDRA protections apply to the offer and sale of every audiotext

service, regardless of the dialing pattern used to access the service.

In addition, the revisions would ensure that international audiotext

services could not be offered in a manner that evades TDDRA's dispute

resolution procedures.

This would be achieved in two ways. First, the proposal would

expand the Rule's definition of ``pay-per-call services.'' Second, the

proposal would prohibit the practice of hiding the cost of an audiotext

service within a regulated toll charge for either a domestic or

international long-distance call.

These proposed revisions address abuses that have arisen in

connection with audiotext services offered through international

numbers and other non-900 dialing patterns. Chief among these abuses is

nondisclosure (or inadequate disclosure) of cost and other material

information to consumers before they incur charges for an audiotext

service. The revised Rule also would give consumers protection against

charges for audiotext services that cannot be blocked from their

telephone lines. In addition, the proposed revisions would ensure that

consumers who incur charges for an audiotext service can use TDDRA

procedures to dispute such charges, regardless of the number dialed to

access the service.

Toll-free Numbers: The original Rule prohibits charging consumers

for an audiotext service accessed by dialing an 800 or other toll-free

number, but it creates a limited exception to this prohibition where

the consumer enters into a prior agreement (a ``presubscription

agreement'') with the provider to pay for the service. The proposed

Rule tightens this exception to prohibit certain abusive practices that

have arisen in connection with billing for audiotext services accessed

by dialing toll-free numbers. These abuses include sham presubscription

agreements, and ineffective methods of preventing unauthorized access

to services under presubscription agreements. The proposed Rule would

require an audiotext provider, before permitting access to a service,

to have a contractual agreement with the party responsible for paying

for the service. The provider would be required to send that party a

written statement of all material terms and conditions of the

agreement, along with a ``personal identification number'' (``PIN'') to

prevent unauthorized access to the service.

Consumers cannot block calls from their lines to toll-free

telephone numbers, so they cannot block access to audiotext services

that are reached by dialing toll-free numbers. Thus, the proposed

revisions to the requirements for presubscription agreements protect

consumers from incurring charges for services they cannot block. The

proposed revisions provide this protection by requiring that a contract

exist between the provider and the person responsible for paying for

the service before the service is provided, and by requiring an

effective method to prevent unauthorized access to the contracted

service.

Finally, the proposed Rule gives consumers additional rights to

dispute charges for audiotext accessed by dialing toll-free numbers. If

consumers have not entered into a ``presubscription agreement'' that

satisfies the proposed Rule's definition of that term, but are charged

for audiotext services accessed through a toll-free number, the revised

Rule permits consumers to challenge such charges as ``billing errors,''

and the Rule's dispute resolution rights and protections would apply.

Unauthorized Charges, or ``Cramming'': Unauthorized charges that

are ``crammed'' on to consumers'' telephone bills generally are for

telephone-billed purchases that cannot be blocked by 900-number

blocking, and many of them are recurring charges. The proposed Rule

takes a four-fold approach to the problem of cramming.

First, the proposed Rule provides that any telephone-billed

purchase, other than one that arose from a blockable (i.e., 900-number)

transaction, requires the express authorization of the person to be

billed for the purchase. The proposed Rule also prohibits vendors,

service bureaus, and billing entities from collecting or attempting to

collect for such unblockable telephone-billed purchase charges where

the vendor, service bureau, or billing entity knew or should have known

that the purchase was not authorized by the person who was the target

of the collection efforts. The revised Rule would create strong

incentives for vendors, service bureaus, and billing entities who offer

telephoned-billed transactions that cannot be blocked to ensure that

such transactions are authorized by the party who is to be billed for

them.

Second, vendors would be prohibited from causing consumers to

receive monthly or other recurring charges for pay-per-call services in

the absence of a presubscription agreement with the person to be billed

for the service. Thus, a single call to a pay-per-call service could no

longer result in a consumer being enrolled in a ``psychic club'' or

other service plan which would result in recurring fees. The vendor

would be required to get advance authorization of the person to be

billed for any pay-per-call service that resulted in recurring fees,

and would be required to send that consumer a written copy of the

agreement before any chargers could accrue.

Third, consumers would be able to dispute unauthorized charges

``crammed'' on to their phone bills and have these charges removed.

Under the proposed Rule, when a consumer disputes a charge for a

service that cannot be blocked,45 the billing entity, in

order to sustain that charge, must provide the consumer with actual

proof that the consumer expressly authorized the transaction that

resulted in the charge. Similarly, under the proposed Rule, when a

consumer disputes a charge purportedly resulting from a presubscription

agreement, the billing entity cannot sustain the charge absent evidence

of a valid presubscription agreement with the person being billed.

Unless the billing entity provides such proof, the charge must be

forgiven. These revisions are intended to deter the current widespread

problem of cramming.

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\45\ The proposed Rule identifies these as charges that cannot

be blocked in advance by 900-number blocking, or TDDRA blocking, as

provided by 47 U.S.C. 228(c).

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Fourth, the proposed Rule provides dispute resolution protections

for all transactions that result in non-toll charges on a subscriber's

phone bill, even if the charges for such purchases did not result from

a telephone call and were not based on ANI capture. This would be

accomplished by expanding the definition of ``telephone-billed

purchase'' to encompass all such transactions. This revision would

ensure that a consumer who has an unauthorized charge on his or her

phone bill--regardless of whether it arose from a telephone call--would

be able to contest the charge through the Rule's dispute resolution

procedures. This revision would address the growing problem of

unauthorized charges being ``crammed'' on to a consumer's telephone

bill as a result of filling out a sweepstakes entry form or some action

other than placing a telephone call.

Liability of Billing Entities and Billing Aggregators for

Unauthorized Charges:

[[Page 58529]]

The proposed Rule would impose liability on billing entities and

billing aggregators for providing unscrupulous vendors the sine qua non

for cramming--access to the telephone billing and collection system.

These parties would be unable to evade responsibility under the revised

Rule for processing charges and inserting them in consumers' monthly

telephone billing statements on behalf of unscrupulous ``crammers'' and

other vendors who blatantly violate the Rule.

Holding billing aggregators responsible for their part in cramming

would be accomplished by amending the Rule's definition of ``service

bureau'' to specifically include billing aggregators. This ensures that

billing aggregators would be liable for civil penalties any time they

``knew or should have known'' that their client-vendors were in

violation of the Rule. Billing entities' responsibilities would be

increased via a proposed provision that would hold them accountable for

billing a consumer for unblockable telephone-billed purchases when they

knew or should have known that the transaction was not authorized by

the consumer being billed.

The proposed revisions addresses the problem of billing entities

and billing aggregators knowingly profiting from, facilitating,

encouraging, and yet evading responsibility for, illegal practices such

as cramming.

Disputed Charges: The proposed Rule would ensure that any time a

consumer disputes a charge for a telephone-billed purchase, the

consumer will not be required to pay that charge until he or she is

provided with both documentary evidence of the validity of the charge

and a written explanation describing why the charge is valid.

This would be accomplished by specifically prohibiting collection

of a charge for a telephone-billed purchase that is in dispute unless

the validity of the charge has been investigated, and unless the

consumer has received an explanation and documentary evidence

supporting the charge's validity. The Rule would also be modified to

give more specific guidance as to what the requirement (present in the

current Rule) for an ``investigation'' entails. To prevent ``passing

the buck'' among multiple parties involved in collecting a charge for a

telephone-billed purchase (e.g., the LEC that prepares and sends the

consumer a phone bill, the billing aggregator that forwards billing

data from the vendor to the LEC, and the vendor that handles the

transaction from which the charge arises), the proposed Rule imposes a

new requirement that these multiple parties (1) designate which of them

will bear ultimate responsibility for receiving and responding to

billing disputes, and (2) disclose that designation on the telephone

bill.

These revisions would address the problem experienced by many

consumers who attempt to dispute a charge for a telephone-billed

purchase, only to be faced with collection action by a party other than

the original billing entity, and who are passed from one billing entity

to another without ever achieving resolution of their dispute. Multiple

parties involved in billing and collection could not hand a consumer

off from one to another, but instead would be required to respond to

the consumer's dispute.

Deceptive Statements to Billing Entities Conducting Investigations:

The proposed Rule would prevent vendors, service bureaus, and providing

carriers from using deceptive tactics in attempting to sustain an

illegitimate charge for a telephone-billed purchase.

This would be accomplished by a provision in the proposed Rule that

would prohibit a vendor, service bureau, or providing carrier from

providing false or misleading information to a billing entity

conducting an investigation of a disputed charge for a telephone-billed

purchase. Thus, practices such as falsely representing to a billing

entity that a consumer called a 900 number when, in fact, the consumer

called a toll-free number, would be prohibited by the proposed Rule.

Solicitations Transmitted by Pager or Facsimile: The proposed Rule

addresses the use of pagers and facsimile machines to solicit calls to

audiotext services. These two techniques have been used deceptively in

connection with audiotext services that are accessed through numbers

other than 900 numbers and that therefore cannot be distinguished from

non-audiotext numbers. The proposed Rule would require disclosure of

cost and other material information in any facsimile-transmitted or

pager-transmitted solicitation to call a pay-per-call service.

The proposed Rule would accomplish this by adding two new

provisions, one expressly requiring the same disclosures in pager

solicitations that are required in advertisements in other media, and

another expressly requiring the same disclosures in facsimile

solicitations that are required in advertisements in other media.

The disclosure requirement for pager solicitations of calls to pay-

per-call services will remedy the deception that occurs when a consumer

receives a pager message and reasonably assumes that an urgent business

or personal reason exists to call a number that turns out to access a

pay-per-call service. The consumer who calls such a number in response

to a page may incur charges for audiotext services without intending to

do so. This Rule modification will eliminate this problem. Similarly,

the disclosure requirements for facsimile solicitations will address

the increasing problem of consumers being urged by facsimile messages

to call numbers that turn out to be pay-per-call services, without

adequate disclosures of cost and other material information about the

advertised service.

Section C. Discussion of Proposed Revisions to the Rule

1. General Changes

Title of the Rule. The Commission proposes to change the title of

the Rule to the ``Rule Concerning Pay-Per-Call Services and Other

Telephone-Billed Purchases.'' The current title (``Trade Regulation

Rule Pursuant to the Telephone Disclosure and Dispute Resolution Act of

1992'') does not adequately describe the purpose of the Rule. The

Commission believes that it is important for the industry and consumers

to recognize that the Rule provides more than just pay-per-call service

standards. The Rule also creates a structure for resolving billing

disputes that applies to a broad array of telephone-billed purchase

transactions. The Commission believes that the title ``Rule Concerning

Pay-Per-Call Services and Other Telephone-Billed Purchases'' more

accurately describes the substance of the Rule.

Organization of the Rule. The Commission proposes to reorganize the

original Rule in several ways to make it easier to read and understand.

In the original Rule, Section 308.2 defined terms relating to the

advertising and operation of pay-per-call services, while Section 308.7

defined terms relating to the billing and collection of telephone-

billed purchases. The Commission proposes moving all of the Rule's

definitions into a single section, proposed Section 308.2.

The proposed Rule also rearranges the order of several other

provisions, and divides the Rule into four subparts in order to improve

its organization and to provide greater clarity: Subpart A, Scope and

Definitions; Subpart B, Pay-Per-Call Services; Subpart C, Pay-Per-Call

Services and Other Telephone-Billed Purchases; and Subpart D, General

Provisions. The Commission also proposes dividing Sections 308.3

(Advertising of pay-per-call services)

[[Page 58530]]

and 308.5 (Pay-per-call service standards) of the original Rule into

several smaller sections, each dealing with a discrete subject. This

approach allows provisions dealing with specific subjects (e.g.,

children's advertising or liability for refunds) to be more easily

identified within the Rule.

Global Wording Changes. The Commission decided to make several

wording changes throughout the proposed Rule to standardize the usage

of specific words and phrases, to more accurately reflect the extended

coverage of the proposed Rule, and to reflect changes in technology

since the original Rule was promulgated. Each change is discussed

below.

(1) Caller, consumer, and customer. The original Rule used three

terms to describe the individual to be protected by the Rule's

requirements--``consumer,'' ``caller,'' and ``customer.'' The

Commission proposes to change the Rule's usage of these three words. In

most cases, the word ``consumer'' has been replaced by one of the other

terms because the term ``consumer'' is not sufficiently precise to

describe the intended beneficiary of the Rule's protections. The terms

``caller'' and ``customer'' better reflect the purpose and intent of

the various provisions. For example, the proposed Rule uses the word

``caller'' in provisions that regulate preamble disclosures because the

person making the call is the beneficiary of the protections in those

sections. On the other hand, the dispute resolution provisions afford

rights to the ``customer,'' a term that includes both the caller and

the person who receives the billing statement. In other provisions,

such as the definition of ``presubscription agreement'' or ``personal

identification number,'' the more generic term ``consumer'' has been

retained because in those instances ``caller'' or ``customer'' would be

too narrow. In some instances, the proposed Rule clarifies that the

person referred to by the Rule is the person to whom the billing

statement has been, or will be, directed.\46\

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\46\ See, e.g., Section 308.2(j)(1).

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(2) Vendor. The term ``vendor'' in the original Rule was used in

the billing and collection section (Section 308.7 of the original Rule)

to describe a person or entity that offers goods or services through a

telephone-billed purchase. The term ``provider of pay-per-call

services'' was used in the sections of the Rule regulating advertising

and operation of pay-per-call services (Sections 308.2 through 308.6).

Even under the original Rule, a ``provider of pay-per-call services''

was a ``vendor'' because all pay-per-call services were telephone-

billed purchases. The proposed Rule simplifies the terminology by using

``vendor'' to refer to all providers of telephone-billed purchases,

including all providers of pay-per-call services.

(3) Use of 888 and 877 numbers. Since the original Rule was

promulgated, the use of toll-free ``888'' and ``877'' numbers has

grown. Therefore, the proposed Rule has added ``888'' and ``877'' to

those provisions of the Rule that deal with the use of toll-free

numbers.\47\

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\47\ Proposed Sections 308.2(b)(4), 308.7(e), and 308.13 contain

those references.

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2. Proposed Revisions to Specific Provisions

The proposed Rule makes no substantive revisions to the following

sections of the original Rule, apart from renumbering and any of the

global wording changes discussed above that might affect these

sections: 308.3(e), 308.4, 308.5(h), 308.5(k), and 308.8.\48\

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\48\ These sections of the original Rule correspond to the

following sections of the proposed Rule: Original Sec. 308.3(e) is

now proposed Sec. 308.5 (Advertising to children prohibited);

original Sec. 308.4 is now proposed Sec. 308.8 (Special rule for

infrequent publications); original Sec. 308.5(h) is now proposed

Sec. 308.11 (Prohibition on services to children); original

Sec. 308.5(k) is now proposed Sec. 308.15 (Refunds to customers);

and original Sec. 308.8 is now proposed Sec. 308.21 (Severability).

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Subpart A--Scope and Definitions

Section 308.1 Scope of Regulations

The proposed Rule adds a citation to the Telecommunications Act of

1996.

Section 308.2 Definitions

The definitions that formerly appeared in the billing and

collection section of the original Rule have been moved to Section

308.2 of the proposed Rule, which contains all definitions. The

definitions have been reordered alphabetically and renumbered

accordingly. The following definitions from the original Rule are

unchanged, apart from renumbering: ``bona fide educational service,''

``Commission,'' ``program-length commercial,'' ``providing carrier,''

``reasonably understandable volume,'' ``slow and deliberate manner,''

and ``sweepstakes.''

(1) Section 308.2(a)--Billing entity. The proposed Rule clarifies

that the term ``billing entity'' covers a person who transmits any

statement of debt to a customer for a telephone-billed purchase,

including, but not limited to, a telephone bill. The definition of

``billing entity'' is critical to the dispute resolution process

governed by Section 308.20 of the proposed Rule because all persons and

entities that fall within the meaning of the term ``billing entity''

will be required to comply with the steps set forth in that section.

This proposed change recognizes that multiple parties often play a role

in the billing and collection of charges for telephone-billed

purchases. The proposed modification helps preserve the consumer's

billing dispute rights in situations where a disputed charge for a

telephone-billed purchase is passed from one billing entity to another.

Under the original Rule, this practice often allowed the consumer's

rights to be extinguished.

The revision to the definition of ``billing entity'' is designed to

cover all of the participants in the typical billing and collection

process for telephone-billed purchases. In most cases, the LEC sends

the initial billing statement to the consumer. On that billing

statement, the LEC provides the disclosures about consumers' rights and

obligations regarding billing errors, as required by original Section

308.7(n). Once a consumer disputes a charge, the other participants in

the billing and collection process (i.e., the vendor or service bureau)

may attempt to collect the disputed charge by calling the consumer and

making oral statements that the consumer has an obligation to pay.

The proposed Rule clarifies that any communication to a consumer

regarding an alleged debt will bring a person within the definition of

``billing entity,'' as long as the communication contains a statement

of debt involving a telephone-billed purchase. Thus, the proposed Rule

ensures that, where multiple entities (including LECs, vendors, service

bureaus, and third-party debt collectors) are involved in collecting a

charge for a telephone-billed purchase, each of those entities will be

considered a billing entity and therefore must afford a consumer his or

her dispute resolution rights under the Rule.

(2) Section 308.2(b)--Billing error. This definition is also a key

concept underlying the dispute resolution provisions set forth in

proposed Section 308.20. Under that section, a billing entity will be

required to refund any disputed amount on a consumer's bill, once the

consumer has invoked his or her rights by submitting a ``billing error

notice,'' unless the billing entity can provide evidence to the

consumer that there was no billing error and that the disputed amount

is a legitimate debt.\49\

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\49\ If a disputed charge is found not to be a ``billing

error,'' the sole consequence is that the Rule does not require the

billing entity to refund the consumer's money. The fact that a

charge is not a ``billing error'' in no way affects any rights that

a consumer may have under State law to dispute that charge or to

receive a refund of that charge. In addition, under State law a

consumer may have rights to dispute charges that are not ``billing

errors.'' The Commission's Rule cannot by law supersede any rights a

consumer may have under State law to dispute such charges, unless

such law is inconsistent with the FTC's Rule. 15 U.S.C. 5722(a).

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[[Page 58531]]

Original definition. The original Rule delineates eight different

types of billing errors. Six of these billing errors track almost

verbatim provisions in TDDRA that define the term ``billing error'' in

a similar list.\50\ A seventh billing error \51\ was added to the

statutory definition pursuant to the Commission's authority to create

additional billing errors,\52\ and in the eighth instance, the

Commission determined that the Rule should not track the statute word-

for-word. In that instance, the statute stated that a billing error

occurred when a telephone-billed purchase was not made by the customer.

By contrast, the original Rule provided that a billing error occurred

when the telephone-billed purchase was not made by the customer nor

made from the customer's telephone.\53\

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\50\ 15 U.S.C. 5724(2)(B-G).

\51\ 16 CFR 308.7(a)(2)(viii).

\52\ 15 U.S.C. 5724(2)(H).

\53\ The statute provided that a billing error occurred when

there was ``[a] reflection on a billing statement for a telephone-

billed purchase which was not made by the customer or, if made, was

not in the amount reflected on such statement.'' 15 U.S.C.

5724(2)(A). By contrast, the original Rule defined the equivalent

billing error as a ``[a] reflection on a billing statement of a

telephone-billed purchase that was not made by the customer nor made

from the telephone of the customer who was billed for the purchase

or, if made, was not in the amount reflected on such statement.'' 16

CFR 308.7(a)(2)(i) [Emphasis added].

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As a result of that modification, under the original Rule, a

consumer was not entitled to dispute a telephone-billed purchase made

from that consumer's telephone on the ground that it was unauthorized.

The Commission refined the statutory definition of ``billing error'' in

this way because, at the time the original Rule was promulgated,

virtually all ``telephone-billed purchases'' were purchases of pay-per-

call services, accessed by dialing 900 numbers. Because TDDRA mandated

that 900-number blocking be made available to consumers by common

carriers,\54\ the Commission reasoned that TDDRA empowered the consumer

to block access to pay-per-call services. The Commission therefore

believed it unnecessary to make available in the case of alleged

unauthorized telephone-billed purchases (in most cases for 900-number

services) the dispute resolution mechanisms appropriate to other kinds

of disputed charges.\55\

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\54\ 47 U.S.C. 228(c).

\55\ The fact that a consumer could not dispute these charges

under the Rule in no way affected the consumer's right under State

law to refuse to pay for a service that was not ordered.

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Changes in the marketplace. In the years since adoption of the

original Rule, the marketplace has changed. In addition to pay-per-call

services, many other goods and services are now the subject of

telephone-billed purchases. More important, billing based on ANI for

services accessed or received through dialing patterns other than 900

numbers (e.g., audiotext provided over international or toll-free

numbers) has become more widely used. These dialing patterns are not

blockable in the manner intended by TDDRA. Thus, it is clear now that

it is possible to offer telephone-billed purchases through methods that

cannot be blocked as TDDRA intended.

In addition to audiotext services, many other products and

services, including club memberships, voice mail, Internet access,

personal 800 numbers, and pagers, are now available through telephone-

billed purchases.\56\ Though some of these services are offered in a

non-deceptive manner, in many instances, consumers have been charged

for these miscellaneous services on their telephone bills even though

they had never authorized or ordered the goods or services for which

they were being charged.\57\ These unauthorized charges have been

characterized by the popular press as ``cramming.'' In theory, there is

no limit to the types of products or services that may be billed on

consumers' telephone statements.

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\56\ Such services, often referred to as ``enhanced services,''

are billed on a telephone bill through the use of the 42-50-01

Exchange Message Interface (``EMI'') billing records.

\57\ FTC v. Hold Billing Services, Ltd., No. SA98CA0629 FB (W.D.

Texas, filed July 19, 1998).

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The Commission has received approximately 9,000 complaints about

cramming since October 1997. Cramming has become the fifth most common

complaint by consumers, as reflected in consumer contacts with the FTC

through its Consumer Response Center. Based on the record in this rule

review proceeding, on the consumer complaints received about this

problem, and on recent State \58\ and Commission \59\ law enforcement

experience, the Commission believes that unauthorized charges pose a

very serious threat to consumers in the telephone-billed purchase

marketplace, and thus a corresponding threat to the healthy growth of

this innovative purchasing mechanism.

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\58\ See, e.g., State of Wisconsin v. Telecom Operator Service

d/b/a USP&C Operator Services, No. 98 CV 2319 (Cir Ct. Milwaukee

County, filed March 27, 1998; amended complaint filed July 27, 1998)

(continuing to bill line subscribers who deny ordering services or

who request backup regarding charges); People of Illinois v. RCP

Enterprises Group, et. al., No. 98 CH 112 (Cir. Ct., 7th Jud. Cir.--

Sangamon County, filed March 19, 1998) (using \1/16\-inch print on

opposite side of sweepstakes entry form as authorization to bill

consumer for calling card services); People of Illinois v. BLJ

Communications, No. 98 CH 113 (Cir. Ct., 7th Jud. Cir.--Sangamon

County, filed March 19, 1998) (sustaining charges for unordered pre-

paid calling cards despite informing consumers that credits would be

issued); People of Illinois v. Coral Communications Inc., No. 98 CH

3526 (Cir. Ct., Ch. Div.--Cook County, filed March 1998) (using

sweepstakes entry forms as authorization to bill for pre-paid

calling cards and voice mail, and sustaining charges for unordered

pre-paid calling cards and voice mail despite informing consumers

that credits would be issued); People of Illinois v. New World

Telecommunications Inc., No. 98 CH 115 (Cir. Ct., 7th Jud. Cir.--

Sangamon County, filed March 19, 1998) (billing line subscribers for

voice mail which they did not order, and failing to provide

effective billing dispute mechanism); State of Missouri ex. rel.

Nixon v. Coral Communications Inc., No. 98 CC 716 (Cir. Ct., St.

Louis County, filed 1998) (using miniature typeface on contest entry

forms as authorization to bill for pre-paid calling cards and voice

mail, and sending follow-up miniature typeface ``junk mail''

postcards as confirmation and last chance for consumer to cancel

services).

\59\ See, e.g., FTC v. Interactive Audiotext Services, Inc., No.

98-3049 CBM (C.D. Calif., filed Apr. 22, 1998); FTC v. International

Telemedia Associates, Inc., No. 1-98-CV-1935 (N.D. Ga., filed July

10, 1998); and Hold Billing Services.

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Proposed definition. The first eight billing errors listed in

Section 308.2(b) of the proposed Rule remain virtually identical to

those in the original Rule.\60\ The proposed Rule, however, adds three

additional billing errors to make newly-emerging problems associated

with unauthorized charges subject to the Rule's dispute resolution

procedures.\61\ A discussion of these provisions follows.

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\60\ The only change is that the proposed Section 308.2(b)(8)

slightly modifies the language in Section 308.7(2)(viii) of the

original Rule to more clearly convey that it is a billing error to

identify charges for telephone-billed purchases in a manner that

violates the Rule's requirements for billing statement disclosures.

\61\ Specifically, these amendments are proposed pursuant to the

Commission's authority under 15 U.S.C. 5724(2)(H) to prescribe

additional billing errors, and pursuant to its rulemaking authority

under 15 U.S.C. 5711(a), 5721(a), and 5723.

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Section 308.2(b)(9)--Charges resulting from a purported

presubscription agreement that does not meet the requirements of the

Rule. This proposed Section specifies that the term ``billing error''

includes any charge incurred pursuant to a purported presubscription

agreement that does not meet the requirements of the proposed Rule's

definition of that term.\62\ This would address a significant problem

that has surfaced since the Rule was promulgated, whereby consumers who

have never entered into a presubscription agreement with a

[[Page 58532]]

provider are charged for audiotext services that are, or allegedly have

been, provided pursuant to a presubscription agreement.\63\

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\62\ ``Presubscription agreement'' is defined in the proposed

Rule at Sec. 308.2(j).

\63\ See, e.g., Interactive Audiotext Services. See, also,

FLORIDA at 8; NCL at 4-5; NAAG at 11; Tr. at 169, 193-94.

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This situation occurs when a telephone line subscriber is billed

for charges under a presubscription agreement entered into by some

other party who dialed an 800 or other toll-free number using the

subscriber's telephone.\64\ The Commission continues to be concerned

that presubscription agreements not be mere shams to justify billing a

consumer for calls to toll-free numbers, or for services sold under an

``agreement'' that is based solely on the fact that a telephone call

was placed from that consumer's telephone (i.e., based solely on ANI

capture).\65\ The proposed new definition of presubscription agreement

is based on this concern, and the corresponding billing error contained

in Section 308.2(b)(9) provides recourse for consumers who have been

wrongly billed for telephone-billed purchases resulting from purported

presubscription agreements entered into by another party, or resulting

from purported presubscription agreements \66\ that otherwise do not

meet the requirements of the Rule.

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\64\ See, e.g., Interactive Audiotext Services. In its comment,

NCL stated that most of the audiotext-related complaints they

receive involve 800 numbers. NCL at 2.

\65\ See, e.g., U.S. v. American TelNet, Inc., No. 94-2551 CIV-

NESBIT (S.D. Fla., filed Nov. 30, 1994). In that case, the

Commission obtained $2 million in redress and a civil penalty of

$500,000 against American TelNet for charging consumers for

information or entertainment services accessed by calling 800

numbers, in violation of the Rule's requirements.

\66\ For there to be a ``purported'' presubscription agreement,

the vendor need not explicitly claim that a charge is based on a

presubscription agreement. For instance, where a consumer is charged

without authorization for a service for which the proposed Rule

requires a presubscription agreement (e.g., monthly or other

recurring pay-per-call service charges), the consumer can make use

of this billing error to dispute the charge.

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Section 308.2(b)(10)--Unauthorized charges not avoidable by

blocking. Section 308.2(b)(10) of the proposed Rule would treat as a

billing error any charges on a customer's billing statement that were

``not expressly authorized by that customer'' and that were not

``blockable pursuant to 47 U.S.C. 228(c).'' \67\ This provision would

enable a consumer to dispute a charge and to receive a refund when a

charge was not authorized by that consumer, and the charge would not

have been avoided had the consumer elected TDDRA blocking. This

proposed billing error dovetails with proposed Section 308.17, which

explicitly requires the ``express authorization'' of the person to be

billed for any telephone-billed purchase that is not avoidable by TDDRA

blocking.

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\67\ Proposed Section 308.2(b)(10). Only the form of blocking

specified by Congress in TDDRA, codified at 47 U.S.C. 228(c), will

satisfy the requirements of this subsection.

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The Commission does not propose revising the definition of

``billing error'' to bring in all unauthorized telephone-billed

purchase charges. The Commission believes that this would sweep too

broadly. In many instances, consumers still have a practical, simple,

and cost-free method of avoiding a large category of unauthorized

telephone-billed purchases--namely, blocking of services accessed

through 900 numbers.\68\ Generally, where 900-number blocking would

have been effective to enable a consumer to avoid an unauthorized

charge, the Commission believes it would be an undue burden on billing

entities to require them to determine if such charges were, in fact,

authorized.\69\

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\68\ Many commenters noted that the availability of 900-number

blocking has resulted in a dramatic decrease in the number of

complaints about 900-number services. AMERITECH at 2; AT&T at 3;

FLORIDA at 10; SW at 4; SNET at 2-3; NCL at 2.

\69\ However, where a single call to a blockable 900 number

results in monthly or other recurring charges on a consumer's

telephone bill, the Commission does not believe that it would be an

undue burden for a billing entity to show proof of authorization. A

single call to a pay-per-call service is simply not enough for a

vendor, service bureau, or billing entity to assume that the

telephone subscriber has authorized his or her enrollment in a

``psychic club'' or other similar service plan. The Commission

proposes requiring that these charges be provided only pursuant to a

presubscription agreement that meets all of the requirements of the

proposed Rule's definition of that term. See proposed Section

308.14.

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In situations where audiotext services are offered through an

unblockable dialing pattern, however, a consumer has no means to

protect herself from being billed for charges that result from another

person accessing the service using her telephone. Many of the

commenters and workshop participants identified this as a significant

problem and a source of numerous complaints.\70\ Where TDDRA blocking

cannot effectively prevent access to telephone-billed purchasing, the

vendor, service bureau, and billing entity should have the obligation

to ensure that the line subscriber has expressly authorized the

purchase. Under these circumstances, consumers who believe that they

have been billed for an unauthorized charge should have the right to

dispute the charge under proposed Section 308.20, and to receive proof

of authorization before collection activities continue.

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\70\ FLORIDA at 8; NCL at 4-5; NAAG at 11; Tr. at 169, 193-94,

472.

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Some commenters urged that the Commission require that all

audiotext services be provided through the 900-number dialing

platform.\71\ Instead, the Commission proposes a more flexible

approach--specifying that it is a billing error if the consumer

receives charges for a telephone-billed purchase that the consumer did

not authorize, and the telephone-billed purchase could not have been

prevented by TDDRA blocking. This will create an incentive for

providers to use a dialing platform that is subject to TDDRA-blocking,

because by using such a dialing platform, these providers will not be

obligated under the proposed Rule to secure evidence that such charges

were expressly authorized by the person being billed.

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\71\ See, e.g., SW at 2; SNET at 2; AT&T at 29-30.

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The Commission uses the term ``express authorization'' in

describing this billing error to indicate that it is not sufficient for

a provider to demonstrate that the telephone of the consumer being

billed was the telephone used to make the call that resulted in a

telephone-billed purchase. In order to sustain the charge, the provider

must show tangible evidence that the person being billed for the

telephone-billed purchase actually consented to the charge.\72\

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\72\ For example, a tape recording of the person who was billed,

agreeing in advance to pay for the charge after hearing the material

terms of the agreement, would constitute evidence of such

authorization sufficient to show that this billing error did not

occur. Of course, if the voice recording was not of the person being

billed, the vendor would not be able to sustain the charge. For

additional examples of evidence of ``express authorization,'' see

discussion of proposed Sec. 308.17, infra.

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Section 308.2(b)(11)--Inconsistency with blocking option selected.

The Commission is aware of complaints from consumers who allege that

900-number calls have been made from their telephones even though the

consumer had previously opted to have a 900-number block on their

telephone.\73\ Section 308.2(b)(11) of the proposed Rule addresses this

situation by specifying that it is a billing error when a consumer

receives a telephone bill containing a charge that is inconsistent with

a blocking option already selected by the consumer. This billing error

will provide the consumer with a means to challenge such a charge and

receive a credit or refund if in fact the consumer had already elected

to block access to that type of service or dialing pattern.

[[Page 58533]]

Under this scenario, regardless of the reason for the block being

ineffective (i.e., because the block failed or because someone using

the consumer's telephone ''dialed around`` the block),\74\ the consumer

would be entitled to a credit or refund if they had elected to block

such calls and the block was supposed to be in place at the time the

call was placed. The Commission believes that once a consumer has taken

the affirmative step to elect TDDRA blocking, this should be

interpreted as an affirmative statement that the consumer does not

authorize any telephone-billed purchases that should have been blocked

by this action. If the TDDRA blocking system fails, the economic burden

should not be borne by the consumer who had taken the steps available

to guard against access to such purchases.

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\73\ TURJANICA at 1. See also, Transcript of ``FCC Public Forum

on Local Exchange Carrier Billing for Other Businesses,'' (June 24,

1997), p. 113.

\74\ For example, a caller can ``dial around'' a 900-number

block that has been placed on the line by the line subscriber's

carrier simply by dialing another carrier's ``10-XXX'' access code,

then dialing a 900 number.

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(3) Section 308.2(e)--Customer. The definition of ''customer``

remains largely unchanged. Depending upon the context, the term refers

to either the person who made the call or the person who received the

bill for a telephone-billed purchase, or both. The only proposed

substantive change is that an unnecessarily limiting phrase at the end

of the definition was deleted. The Commission intends for this

definition to cover any recipient of a bill for a telephone-billed

purchase, regardless of whether he or she is the subscriber.

(4) Section 308.2(f)--Pay-per-call purchase. The Commission has

added a definition of ``pay-per-call purchase'' to fill the need for a

term that succinctly refers to both an attempt to purchase a pay-per-

call service as well as an actual purchase of such services.

(5) Section 308.2(g)--Pay-per-call service--Background. Virtually

all interested parties--industry as well as consumer advocates and law

enforcement--overwhelmingly support extending the definition of ``pay-

per-call service'' to cover audio information and entertainment

services that are accessed and delivered through dialing patterns other

than 900, but in other respects are similar to 900-number services and

subject to the same abuses.\75\ Indeed, the majority of complaints now

relate to toll-free numbers, international numbers, or other dialing

patterns that do not use the 900-number prefix.\76\ In general, the

problems associated with these non-900 audiotext services are the same

types of problems that Title II of TDDRA was designed to prohibit--

misrepresentations about the underlying service to be provided and

inadequate cost disclosures.\77\

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\75\ AARP at 3; ALLIANCE at 4-6; AT&T at 24; CINCINNATI at 1; CU

at 1; FLORIDA at 2; NCL at 3; GORDON at 1, 3; ISA at 26-27; SNET at

4-6; SW at 2, 4-5; TSIA at 20-21; Tr. at 17-19, 21-24, 38-40, 418,

458.

\76\ ALLIANCE at 2-3; CINCINNATI at 1; FLORIDA at 4; NAAG at 1;

NCL at 2; SW at 2; SNET at 3-4. NCL states that, in 1996, it

received three times as many complaints about 800 numbers as it did

about 900 numbers. (NCL at 2).

\77\ See, e.g., FTC v. International Telemedia Associates, Inc.,

No. 1-98-CV-1935 (N.D. Ga., filed July 10, 1998); FTC v. Interactive

Audiotext Services, Inc., No. 98-3049 CBM (C.D. Calif., filed April

22, 1998); FTC. v. Audiotex Connection, Inc., No. 97-0726 (E.D.N.Y.,

filed Feb. 13, 1997); and FTC. v. Daniel B. Lubell, No. 3-96-CV-8200

(S.D. Iowa, filed Dec. 17, 1996).

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The influx of complaints in recent years concerning international

audiotext services drew particular attention from commenters, many of

whom asserted that it is essential for international audiotext services

to be subject to the same rules as 900-number services in order to

``level the playing field'' among competitors and protect all consumers

who utilize such services.\78\ In fact, several commenters suggested

that all audiotext services should be restricted to the 900-number

dialing pattern to ensure adequate protection to consumers.\79\ The two

commenters representing the international audiotext industry were the

only commenters who opposed the extension of the definition of ``pay-

per-call services'' to include international dialing patterns.\80\

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\78\ See, e.g., GORDON at 3; ISA at 26-27; CINCINNATI at 1; SNET

at 3; Tr. at 17-19, 458.

\79\ SNET at 2; SW at 2; AT&T at 29-30; Tr. at 344, 369.

\80\ ATN generally; ITA at 3-9.

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Characteristics of services that should be covered by the Rule. The

Commission believes that there are two fundamental distinguishing

characteristics of all audiotext services: (1) the instantaneous nature

of the transaction; and (2) the eventual receipt of remuneration by the

provider of the audio information or entertainment. The instantaneous

creation of a financial obligation--the result of the instant capture

of ANI by the provider--not only enhances the convenience for the

seller and buyer, it also creates fertile ground for deception.\81\

Title II of TDDRA, and the provisions of the original Rule that

implemented it, were designed specifically to remedy this potential for

misrepresentation.

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\81\ Congress recognized that the instantaneous nature of the

purchase of pay-per-call services is what made the consumer

protections under Title II of TDDRA so important. Congress noted

that ``[b]ecause the consumer most often incurs a financial

obligation as soon as the pay-per-call transaction is completed, the

accuracy and descriptiveness of vendor advertisements become crucial

in avoiding consumer abuse.'' 15 U.S.C. 5701(b)(6).

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Based on the record in this proceeding, and based on the

Commission's enforcement experience, the Commission believes that, in

any circumstance where a provider solicits consumers to call a

telephone number to receive information or entertainment, and where

that provider will receive a per-call or per-minute payment as a result

of those calls, the service is susceptible to the same types of unfair

and deceptive practices that are prohibited by Title II of TDDRA.\82\

The record does not suggest any justification for treating non-900

audiotext services any differently from 900 audiotext services.\83\ In

both circumstances, the two key factors which create the incentive and

susceptibility for fraud are both present: instantaneous purchase by

virtue of placement of a telephone call, and receipt of remuneration

from the call revenue to the provider of the audio information or

entertainment.

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\82\ See, e.g., FTC v. International Telemedia Associates, Inc.,

No. 1-98-CV-1935 (N.D. Ga., filed July 10, 1998); FTC v. Interactive

Audiotext Services, Inc., No. 98-3049 CBM (C.D. Calif., filed Apr.

22, 1998); and FTC v. Daniel B. Lubell, No. 3-96-CV-8200 (S.D. Iowa,

filed Dec. 17, 1996). See also, ALLIANCE at 2, 4; AARP at 2-3; AT&T

at 6; CINCINNATI at 1; CU at 1; FLORIDA at 1, 5; GORDON at 2; ISA at

4, 26-27; NAAG at 9-10; NCL at 3; SNET at 4; SW at 2; TSIA at 20-21.

\83\ In fact, the record indicates that the danger of unfair and

deceptive practices may be greater in non-900 audiotext because

consumers are not able to effectively block access to these

services. See, e.g., International Telemedia Associates and

Interactive Audiotext Services. See also, ALLIANCE at 2-4; NAAG at

2.

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Proposed definition of ``pay-per-call services.'' Pursuant to the

authority granted to the Commission under Section 701(b) of the 1996

Act, the Commission proposes to extend the definition of ``pay-per-call

services'' to cover all purchases of telephone-based audio information

or audio entertainment services. The new definition is set forth in

Section 308.2(g) of the proposed Rule.

Section 308.2(g)(1) sets forth the statutory definition of ``pay-

per-call services.'' Sections 308.2(g)(2)-(3) augment this definition

while retaining the substance of 47 U.S.C. 228(i)(1)(A) and 228(i)(2),

pursuant to the Commission's mandate under Section 701 of the 1996 Act.

The proposed definition is designed to bring within its reach any audio

information or entertainment service, accessed by dialing any telephone

number or receipt of any telephone call, where all or a portion of the

charge paid by the consumer ``results in payment, either directly or

indirectly, to the person who

[[Page 58534]]

provides or purports to provide such information or entertainment

service.'' \84\ This proposed change in the Rule brings international

audiotext services squarely within the definition of ``pay-per-call

services.''

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\84\ There are four exemptions which are discussed infra: (1)

services resulting in de minimis remuneration to the provider; (2)

services delivered pursuant to a valid presubscription agreement;

(3) services utilizing telecommunications for the deaf; (4) and

tariffed directory services provided by a common carrier or its

affiliate.

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Both the written comments and the workshop discussion strongly

supported using remuneration to an information or entertainment

provider as the distinguishing characteristic of pay-per-call

services.\85\ Several commenters, however, were opposed to the strict

use of a remuneration standard to the extent that it would encompass

some services where the remuneration was disguised within the charge

paid by the consumer for the transmission of the call (e.g., 10-XXX

audiotext,\86\ international audiotext).\87\ One commenter supported

expansion of the definition of pay-per-call services to cover ``all

international audiotext transactions'' \88\ but strongly opposed the

extension of the definition of pay-per-call services to cover audiotext

services where the consumer merely pays a domestic toll charge that is

similar in price to a ``content neutral'' (non-audiotext) call.\89\

Another commenter went further, opposing coverage of any audiotext

services where the payment to the provider is contained within the

toll-charge. The commenter characterized those services where the

remuneration takes the form of a toll charge as ``free to consumers''

because the consumers pay ``no more than the normal toll charge.'' \90\

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\85\ See, e.g., ALLIANCE at 5; NAAG at 9-10; AT&T at 8, 25-28;

Tr. at 331.

\86\ Another alternative to the 900-number dialing pattern is

audiotext accessed through a particular common carrier's ``10-XXX''

access code (such as ``10-321''). Under this scenario, callers reach

the audiotext service by dialing the 10-XXX number followed by a

long-distance telephone number. The resulting toll charge to the

consumer thus includes a hidden charge for the audiotext service

itself, because the carrier and the vendor share the call revenue.

The FCC effectively put an end to this practice through a

pronouncement in an advisory opinion letter, which stated that

common carriers that engage in such practices are ``not providing

common carrier services in a just and reasonable manner as required

by Section 201(b) of the [Communications] Act and the spirit of

[Title I of TDDRA].'' See letter dated September 1, 1995, to Ronald

J. Marlowe of Cohen, Berke, Bernstein, Brodie, Kondell & Laszlo,

from John B. Muleta, Chief, Enforcement Division, Common Carrier

Bureau, Federal Communications Commission. These 10-XXX access codes

are currently being converted to ``101-XXX'' numbers.

\87\ DMA generally and at 4; ISA at 28; Tr. at 309-310.

\88\ ISA at 26-27.

\89\ ISA at 28.

\90\ DMA at 2-3. The Commission finds the characterization of an

international audiotext service as ``free'' to be misleading. This

issue is specifically addressed in FTC. v. Daniel B. Lubell, No. 3-

96-CV-8200 (S.D. Iowa, filed Dec. 17, 1996).

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The fact that an international audiotext or 10-XXX audiotext call

may cost the same as an ordinary, non-audiotext, ``content neutral''

toll call is not determinative on the issue of susceptibility to the

unfair and deceptive practices prohibited by the Commission's Rule.\91\

Content neutral calls (i.e., regular toll calls) might cost the same

amount as certain audiotext calls, but the fact that there is no

remuneration to the call recipient in the case of a content neutral

call is an important distinction. Because the recipient of a content

neutral call lacks the economic incentive to induce consumers to call

as often as possible and stay on the line as long as possible, content

neutral calls are not susceptible to the types of unfair and deceptive

practices that are prohibited by the original Rule. It is the presence

of this economic incentive in audiotext services that gives rise to the

susceptibility to unfair and deceptive practices.\92\

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\91\ Similarly, the fact that some 900-number audiotext programs

may cost the same or less than many international or domestic toll

charges does not make these services any less susceptible to the

unfair and deceptive practices prohibited by the Commission's Rule.

\92\ On the other hand, to the extent that a great portion of

the toll charge actually goes towards the genuine cost of

transmission of the call, and not to the information or

entertainment provider, a call might fit within the exemption

proposed by the Commission for de minimis payments to a provider,

discussed infra. Proposed Section 308.3(a)(3)(ii).

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Circumstances where there will be a rebuttable presumption of

remuneration to a provider. Although remuneration to the service

provider is the hallmark of any pay-per-call service, the actual

details evidencing certain remuneration agreements are not likely to be

immediately available to federal and State law enforcement authorities.

For example, information about contractual arrangements between a

vendor and a foreign telephone company may not be readily available.

Nonetheless, enforcement experience of the FTC and State attorneys

general has shown that there are certain circumstances that generally

indicate that a revenue-sharing agreement exists.\93\ Thus, any of

these circumstances will give rise to a rebuttable presumption that

payment to a provider of audio information or entertainment services as

described under 308.2(g)(2) has been made:

\93\ See, e.g., Interactive Audiotext Services, Inc., No. 98-

3049 CBM (C.D. Calif., filed April 22, 1998); FTC v. Audiotex

Connection, Inc., No. 97-0726 (E.D.N.Y., filed Feb. 13, 1997); and

Daniel B. Lubell.

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(a) Where persons are solicited to call an international

telephone number in order to receive audio information or

entertainment that is not specifically related to or dependent on

the country where the call supposedly terminates; \94\

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\94\ For example, in Daniel B. Lubell, callers were solicited to

call telephone numbers in Guyana and the Dominican Republic in order

to enter a sweepstakes to win a free Hawaiian vacation and to

receive information about free domestic airline travel.

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(b) Where there is a sudden and unusual increase in the number

of long-distance calls to a particular telephone number, or where

the number of calls to an information or entertainment number is

unusually high; \95\

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\95\ For example, in Audiotex Connection, AT&T noted an unusual

and sudden increase in call volume to several telephone numbers in

Moldova.

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(c) Where persons are solicited to call one or more specific

telephone numbers via a specific common carrier in order to receive

audio information or entertainment services; \96\ and

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\96\ For example, solicitations for consumers to call specific

telephone numbers, along with instructions for a caller to first

dial a carrier's 10-XXX (now 101-XXXX) access code.

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(d) Where a provider of audio information or audio entertainment

utilizes advertisements that emit electronic signals, including data

transmission of computer programs or computer instructions, that can

automatically dial a telephone number which will result in charges

to a subscriber.\97\

\97\ Audiotex Connection.

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The fact that any one of these circumstances is present will not be

determinative of whether remuneration to a provider actually exists. It

merely gives rise to a presumption of remuneration that can be rebutted

with credible evidence that, in fact, there has been no payment to the

provider.

Scope of definition. The proposed definition of ``pay-per-call

services'' covers ``audio information and audio entertainment

[services], including simultaneous voice conversation services.''

This phrase includes live as well as pre-recorded information or

entertainment programs, in addition to so-called ``group access

bridged'' services where a provider connects two or more callers to

discuss a certain topic.\98\ In other words, this definition will

include all services where a person provides or purports to provide the

audio content of a call, and where that provider receives payment on

the basis of calls placed to access that content.

[[Page 58535]]

The expanded portion of the proposed definition includes all of the

audio information and audio entertainment services included in the

statutory definition of ``pay-per-call'' \99\ but, pursuant to the

Commission's authority under Section 701(b)(1) of the 1996 Act, omits

any limitations based on dialing pattern.

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\98\ For example, if a provider offers callers a list or menu of

suggested topics or otherwise represents that callers will be able

to listen to or participate in discussions concerning certain

topics, such as ``adult'' chat, that service would be covered by the

definition. Providers who make no representations regarding the

content of a call, and who exercise no control, influence, or

interest over the content of the call would not be covered by the

definition.

\99\ 47 U.S.C. 228(i)(1)(A)(i) and (ii).

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The proposed expanded definition includes only those services

``where the action of placing the call, receiving a call, or subsequent

dialing, touch-tone entry, or comparable action of the caller'' results

in a charge to a customer.\100\ This phrase is based on the language

contained in the original Rule's definition of ``telephone-billed

purchase.'' \101\ However, in addition to the language contained in

that definition, the Commission has added ''receiving a call`` to the

list of actions that would result in a charge to the consumer and thus

be included as a ``pay-per-call service.''

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\100\ ``Comparable action'' includes any scenario where a caller

takes action that will result in a billing statement being generated

by virtue of ANI. See, e.g., FTC v. International Telemedia

Associates, Inc., No. 1-98-CV-1935 (N.D. Ga., filed July 10, 1998)

and Interactive Audiotext Services, Inc., No. 98-3049 CBM (C.D.

Calif., filed April 22, 1998). It also includes, but is not limited

to, any action that a consumer might take while on the Internet or

online that may cause his or her computer modem to dial a telephone

number that results in a charge. See Audiotex Connection.

\101\ Section 308.7(a)(6) of the original Rule uses the term

``telephone-billed purchase'' to describe transactions to which the

billing and collection provisions of the Rule apply.

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The Commission uses the phrase ``receiving a call'' to refer to all

instances where a consumer incurs a charge by virtue of receiving a

telephone call, including traditional ``collect call'' services, as

well as other scenarios whereby the receipt of a call results in a

charge. The Commission's experience with callback schemes in response

to toll-free calls by consumers demonstrates that these schemes are

susceptible to the types of abuses prohibited by the Commission's

Rule.\102\ The fact that the services are accessed by merely answering

a telephone call (rather than placing a call) may make them even more

susceptible to unfair and deceptive practices than outgoing calls from

consumers because the recipient of the bill has even less ability to

avoid charges for such services.\103\

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\102\ In fact, the Commission's Rule explicitly prohibits

collect callback schemes that result from calls to toll-free

numbers. See, e.g., International Telemedia Associates.

\103\ Although audiotext services delivered by incoming calls to

consumers are covered by the proposed definition of pay-per-call

services, this does not mean that such services would be permissible

under the proposed Rule. On the contrary, billing for such services

would almost certainly violate proposed Section 308.17.

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Section 308.2(g)(3)(i)-(iii)--Exemptions. These provisions describe

the circumstances under which an audio information or entertainment

service will not be considered to be a ``pay-per-call service'' and

will thus be exempt from the Rule's requirements, even if it would

otherwise meet the criteria contained in proposed Section 308.2(g)(2).

Each exemption is discussed below.

Section 308.2(g)(3)(i)--Presubscription agreement. This section

will exempt from the Rule's requirements calls made pursuant to valid

``presubscription agreements,'' which are described, infra. The

Commission's intention is that no exemption will exist unless the

presubscription agreement meets all of the elements of the definition

of that term, as set forth in proposed Sec. 308.2(j). This includes the

requirement that the provider demonstrate that the presubscription

agreement has been entered into with the person from whom payment is

sought. As discussed, infra, the Commission has learned that, in many

instances, providers of audiotext services have attempted to collect

payment pursuant to a purported presubscription agreement from persons

who did not authorize or were not aware of the existence of such an

agreement. In order to be valid, a presubscription agreement must meet

the criteria set forth in proposed Section 308.2(j).\104\ Any agreement

not meeting these criteria is not exempt from the Rule and its

requirements.

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\104\ Among other things, this means that the agreement must be

entered into with the person to be charged for the service.

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Section 308.2(g)(3)(ii)--De minimis payments. This proposed section

will allow a vendor of audio information or audio entertainment

services to show that a service is not a pay-per-call service by

demonstrating that the payment received by the provider does not exceed

a specified amount.\105\ Many of the commenters and workshop

participants supported a rebuttable presumption approach to a

definition--whereby a service would be presumed to be ``pay-per-call''

unless the provider could show certain facts mitigating the likelihood

of fraud.\106\ The Commission proposes such an approach. Providers

could rebut the presumption of ``pay-per-call'' by demonstrating that

the payment for the information or entertainment is de minimis as

defined by Section 308.2(g)(3)(ii).

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\105\ The Commission intends that the demonstration specified by

this section need only be made upon a prior request by the

Commission or its staff, or by any other government agency with the

authority to enforce this Rule, or as a defense to an enforcement

action under this Rule.

\106\ Alliance at 5; ISA at 28; AT&T at 8, 25-28; Tr. at 329,

331, 335.

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At some point the amount of shared revenue is not sufficiently

large for a service to be susceptible to the unfair or deceptive

practices prohibited by Title II of TDDRA. Thus, the proposed Rule sets

a specific threshold for such revenue, below which an audiotext service

would not be considered pay-per-call, even if it otherwise met the

definitional criteria. The comments and discussion at the workshop

support this approach.\107\ The Commission has proposed that if the

provider demonstrates that, on average,\108\ the payments to the

provider will not exceed $.05 per minute or $.50 per call for the

particular service, then the service will not be considered pay-per-

call.\109\ The Commission seeks comment on the appropriate threshold

figure for defining pay-per-call, including any relevant statistics or

other numerical support.\110\

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\107\ Tr. at 335-36. The AT&T supplemental comment argued

against a threshold that was triggered by a certain percentage of

the payment going to the vendor. AT&T-2 at 2-4. However, the AT&T

supplemental comment did not address the possibility of a threshold

triggered by a specific per-minute amount as proposed by the

Commission. Indeed, many of the arguments made by AT&T in opposition

to a percentage threshold seem to provide support for a nominal per-

minute threshold.

\108\ The average will be calculated for each different

audiotext service offered by the provider. In the case of a ``loss

leader,'' where call volumes are inflated with low charges for some

consumers to bring down the average to allow others to be charged

higher rates, the Commission will consider services that charge

different rates (e.g., one high-priced and the other low-priced) to

be separate services.

\109\ The provider would only be required to demonstrate that

the remuneration it receives fell below either the $0.50 per-call de

minimis threshold or the $0.05 per-minute de minimis threshold. The

Commission has selected these two figures based on its enforcement

experience and on widely available data provided by service bureaus

for international audiotext services. The appropriate threshold is

one below which there is little incentive for vendors to solicit

calls for the sale of audio information or entertainment. Certain

arrangements, such as those described by AT&T in its comments

(``TSAAs'') may not be subject to unfair or deceptive practices

because the payments involved may fall below the threshold. Although

the record does not contain details relating to the level of

remuneration involved in TSAAs, AT&T's statements at the workshop

would seem to indicate that a $0.05 de minimis threshold would

exempt these agreements. Tr. at 355. As explained in note 110,

infra, the Commission does not agree with the view of some

commenters who urged that exemptions should be granted for specific

categories or types of revenue sharing arrangements, such as an

exemption for all TSAAs. See, e.g., AT&T at 8, 25-30.

\110\ The Commission wants to ensure that its de minimis

provision exempts only those information or entertainment services

that are not susceptible to the unfair or deceptive practices

covered by the Rule. One example of such a service is a local time

or weather information line that is operated by a LEC. Undoubtedly,

the LEC derives some minimal revenue for calls to these information

lines. However, most callers will pay nothing to access the line.

More importantly, the per-call and per-minute revenues derived by

the common carrier for such a line are likely to be well below the

de minimis thresholds. The Commission believes that the de minimis

exemption is the best way to exempt such services--a categorical

exemption for such information lines would be open to abuse by

unscrupulous vendors who could use common carrier status to derive

significant revenue from information or entertainment lines.

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[[Page 58536]]

Other exemptions. Section 308.2(g)(3)(iii) exempts calls utilizing

telecommunications services for the deaf, and tariffed directory

services provided by a common carrier or its affiliate. This exemption

tracks analogous language in the statutory definition of ``pay-per-call

services'' found in Title I of TDDRA.\111\ The proposed Rule adds the

word ``tariffed'' to clarify the meaning of the exemption, and to

prevent unscrupulous vendors from seeking to abuse the exemption.

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\111\ 47 U.S.C. 228(i). The Commission has not been given the

authority under Sec. 701(b) of the 1996 Act to extend the definition

of pay-per-call services to eliminate these exemptions.

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Relationship to FCC regulations. Section 308.2(g)(4) states that

this section shall not be construed to permit any conduct or practice

otherwise precluded or limited by regulations of the Federal

Communications Commission. For example, if the FCC were to adopt

regulations prohibiting the use of a specific dialing pattern for pay-

per-call services, the FTC's ``pay-per-call service'' definition cannot

be used as a basis to argue that the FTC has permitted such a practice.

The Commission believes it is important to make it clear that a service

is not necessarily legal or permissible for purposes of FCC regulation

of pay-per-call services simply because it falls within the FTC's

proposed definition of ``pay-per-call.''

(6) Section 308.2(h)--Person. The definition has been modified to

add ``unincorporated association'' and ``group'' to the list of

entities that are considered to be a ``person'' for purposes of the

proposed Rule. The Commission adds these two terms based on enforcement

experience \112\ and the desire for consistency among its rules

regulating telephone-related transactions.\113\

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\112\ FTC v. Audiotex Connection, Inc., No. 97-0726 (E.D.N.Y.,

filed Feb. 13, 1997) (International audiotext scheme where one

defendant did business as ``Electronic Forms Management,'' an

unincorporated association).

\113\ The definition of ''person`` in the Telemarketing Sales

Rule includes all of these entities. 16 CFR 310.2(o).

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(7) Section 308.2(i)--Personal identification number. Section

308.2(i) provides a definition of ``personal identification number''

(``PIN''), a term used in the definition of presubscription agreement.

The original Rule's definition of presubscription agreement used a

similar term, ``identification number,'' but did not define that term

or specify the manner in which it should be issued.

Background. Use of a presubscription agreement allows a vendor to

avoid the Rule's requirements by entering into a contractual agreement

with a consumer for providing, and receiving payment for, goods or

services in a manner that, absent the agreement, would otherwise be

covered by the Rule. This means that if a provider has a valid

presubscription agreement with a consumer, the provider may provide

services to that consumer in a manner that would otherwise violate the

Rule (e.g., the provider may charge a consumer for audiotext services

accessed via a toll-free number). Where a consumer has entered a

presubscription agreement, a PIN provides a means by which the consumer

can control access to the service to which he or she has presubscribed.

Thus, the original Rule establishes that one of the prerequisites of a

PIN is that it prevent unauthorized access to the service by

nonsubscribers.\114\

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\114\ 16 CFR 308.2(e)(1)(iv).

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Nonetheless, some service providers have utilized PINs that do not

prevent such unauthorized access. For example, some service providers

have issued PINs over the telephone upon request, without taking

sufficient steps to ensure that the party who has requested the PIN is

also the person who will be billed for the presubscribed charges.\115\

Other providers have assigned a consumer's checking account number as a

PIN and then debited that checking account for services purchased by

any caller who presented that PIN number.\116\ Such billing methods do

not prevent unauthorized access where insufficient steps are taken to

ensure that the person paying by this method is actually authorized to

debit that account. Purported presubscription agreements that entail

these methods of assigning PINs do not satisfy the original Rule's

criteria for a presubscription agreement because such PINs are

ineffective to ``prevent unauthorized access by nonsubscribers.''

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\115\ See, e.g., U.S. v. American TelNet, Inc., No. 94-2551 CIV-

NESBIT (S.D. Fla., filed Nov. 30, 1994) and FTC v. Interactive

Audiotext Services, Inc., No. 98-3049 CBM (C.D. Calif., filed Apr.

22, 1998). See, also, FLORIDA at 8, A44-A60; NAAG at 11; NCL at 4.

\116\ Interactive Audiotext Services.

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Proposed definition of ``personal identification number.'' The

proposed definition will furnish additional guidance to providers on

what methods of assigning a PIN satisfy the Rule's requirements. The

revised Rule specifies that the PIN must be ``unique to the

individual.'' This means that the PIN must be assigned to the person

who will be billed for the offered goods or services, not to a

telephone number or account. PIN assignments on the basis of ANI do not

satisfy the original Rule's requirement that a PIN prevent

``unauthorized access to the service by nonsubscribers,'' \117\ and

would continue to be inadequate under the proposed Rule because they

are not unique to the individual. The requirement that a PIN be unique

to the individual also means that a provider cannot issue the same PIN

to more than one person. Moreover, a PIN cannot be based on a number

that is likely to be known to other persons, such as the telephone

number from which the call is placed, a person's checking account

number, credit card number, or social security number. Since the

purpose of a PIN is to limit access to the service to those persons who

have entered into a presubscription agreement, allowing a well-known or

published number (such as a telephone number) would do little to

control access.

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\117\ 16 CFR 308.2(e)(1)(iv).

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The proposed definition also specifies that the PIN must be valid.

Three conditions must be met in order for a PIN to be valid: (1) it

must be requested by a consumer; \118\ (2) it must be provided to no

person other than the person who will be billed for the service; \119\

and (3) it must be delivered to the person to be billed for the service

simultaneously with a clear and conspicuous \120\ written disclosure of

all the material terms and conditions associated with the

presubscription

[[Page 58537]]

agreement, including the service provider's name and address, a

business telephone number that the consumer may use to obtain

additional information or register a complaint, and the rates for the

service. Although the proposed Rule does not require that a

presubscription agreement be signed, the Commission believes that it is

important for the consumer to be provided with a written copy of the

terms of the agreement before the service is accessed for the first

time. Written disclosures sent along with the PIN ensure that the

consumer will receive an ``unavoidable'' disclosure of the material

terms and conditions before the service can be accessed and before any

charges can accrue.

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\118\ Thus, unsolicited issuance of PIN numbers will not meet

the proposed Rule's requirements for establishing a valid PIN.

\119\ A valid PIN will become invalid by later disclosure to the

wrong party. Thus, providers must use caution when giving out PINs

to persons who claim to have ``lost'' or ``forgotten'' a previously-

issued PIN.

\120\ The concept of ``clear and conspicuous'' disclosure is

well-developed in Commission case law and policy statements. See,

e.g., Thompson Medical Co., 104 F.T.C. 648, 797-98 (1984); The

Kroger Co., 98 F.T.C. 639, 760 (1981); Statement of Enforcement

Policy, ``Clear and Conspicuous Disclosures in Television

Advertising,'' Trade Regulation Reporter (CCH) para. 7569.09 (Oct.

21, 1970); Statement of Enforcement Policy, ``Requirements

Concerning Clear and Conspicuous Disclosures in Foreign Language

Advertising and Sales Materials,'' 16 CFR 14.9.

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The Commission does not believe it is necessary to specify the

method by which the PIN should be delivered; service providers may use

whatever method of delivery is most appropriate. Regardless of the

method chosen, however, the service provider will be responsible for

ensuring that the PIN is not distributed to anyone other than the

person who will be billed for services under the presubscription

agreement.

(8) Section 308.2(j)--Presubscription agreement--Background. The

purpose of the presubscription agreement is to allow the seller and

consumer to mutually agree to remove themselves from the TDDRA

regulatory framework. The definition of this term generated substantial

discussion both in the written comments and during the workshop. One

significant issue was whether such agreements should be in writing and

signed by the consumer. The audiotext industry generally opposed a

writing requirement because it would inhibit the ``instantaneous''

nature of audiotext services offered through 800 numbers.\121\ Other

parties countered industry's arguments by asserting that the proper

vehicle for offering instantaneous information or entertainment has

been, and continues to be, through the 900-number dialing pattern.\122\

These commenters believe that any vendor wishing to sell such goods or

services through 800 numbers must take particular care to ensure that

the consumer understands the material terms under which the service is

offered, including that the consumer will be charged for the goods or

services, and how much he or she will pay. One commenter specifically

recommended that the Rule require these disclosures to be provided

before the consumer incurs charges, even if that means that the

purchase is not instantaneous.\123\

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\121\ PILGRIM at 19, 21-22; Tr. at 487-90.

\122\ Tr. at 79, 493, 495.

\123\ SW at 5.

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Many commenters favored a writing requirement because of the

numerous complaints from consumers who have been charged for calls to

800 numbers in situations where they did not authorize such charges or

where the goods or services had been represented to be free.\124\

Several commenters were troubled by presubscription agreements that

were formed orally during the course of a telephone call in which the

consumer is issued an ``instant'' calling card or is asked to provide

bank account information.\125\ As a result, they urged the Commission

to ban oral transmission of presubscription agreements and to require

that presubscription agreements be in writing.\126\ Many of the same

commenters believed that a written agreement was particularly important

in situations where charges would be recurring.\127\ NCL noted that

many of the complaints received by its National Fraud Information

Center (``NFIC'') were from consumers who thought that certain 800-

number calls were free but found out that they had been charged for the

calls and/or inadvertently signed up for services, such as club

memberships or voice mail, to which they had not expressly agreed.\128\

Two common carriers agreed that a presubscription agreement must be in

writing.\129\

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\124\ FLORIDA at 8; NCL at 4-5; NAAG at 11; Tr. at 169, 193-94,

472-74.

\125\ NCL at 5; FLORIDA at 8; NAAG at 11.

\126\ NCL at 5; FLORIDA at 8; NAAG at 11; SW at 2, 5-6; Tr. at

18. NAAG suggested that electronic transmission of the agreement

would also be sufficient to inform the consumer of the costs and

terms and conditions of the service. (NAAG at 11). SW suggested that

if electronic transmission is allowed, there should be a 10-day lag

before the vendor could bill for the service, during which time the

vendor should send a written confirmation of the agreement. (SW at

2, 5-6).

\127\ NCL at 5; FLORIDA at 8; NAAG at 11; TSIA at 16-17.

\128\ NCL at 4. (In 1996, the NFIC received 85 complaints

against one Texas-based company regarding unauthorized charges for

voice mail service after consumers had called an 800-number for a

``free'' psychic reading.)

\129\ AT&T at 10; SW at 2, 5-6; Tr. at 488.

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The industry representatives as a whole generally opposed a

requirement that the agreement be signed, based on the argument that

the signature of an individual neither demonstrates legal competence

nor that the proper person is being billed for the service.\130\ One

industry member argued that requiring an executed agreement might

prevent contemporaneous purchase of merchandise.\131\ Industry members

also pointed out the difficulties in requiring an agreement to be

signed and sent back, and that the failure of someone to sign and

return an agreement would not necessarily indicate a lack of desire to

use the service.\132\

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\130\ PILGRIM at 19, 21-22; Tr. at 487-90.

\131\ PILGRIM at 19, 21-22; Tr. at 487-90.

\132\ Tr. at 487-88.

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A presubscription agreement must meet general principles of

contract law.\133\ Nonetheless, the Commission is aware of numerous

examples of purported ``agreements'' created during calls to 800

numbers that do not adhere to these basic principles of contract law--

e.g., agreements entered into with minors, or agreements where the

party to be billed for the service is not the party who placed the call

and supposedly entered into the agreement.\134\ Often, these purported

``agreements'' involve the use of ANI to identify a billing name and

address and to send a bill, a practice that frequently results in one

consumer receiving a bill for a service ordered by another.\135\

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\133\ Complying with the 900-Number Rule: A Business Guide

Produced by the Federal Trade Commission (Nov. 1993) at 3.

\134\ See, e.g., FTC v. Interactive Audiotext Services, Inc.,

No. 98-3049 CBM (C.D. Calif., filed Apr. 22, 1998) and FTC v.

International Telemedia Associates, Inc., No. 1-98-CV-1935 (N.D.

Ga., filed July 10, 1998). Indeed, the Commission's first action to

enforce the 900-Number Rule challenged invalid presubscription

agreements. U.S. v. American TelNet, Inc., No. 94-2551 CIV-NESBIT

(S.D. Fla., filed Nov. 30, 1994).

\135\ The Commission's view that ANI is insufficient to identify

the party to a presubscription agreement is shared by FCC staff, as

evidenced by a 1994 letter from FCC staff, relating to the issue of

billing for audiotext services offered through 800 numbers. The FCC

letter stated that a legitimate presubscription agreement is not

created if the vendor immediately issues a personal identification

number without determining that the caller is both the subscriber to

the line and legally capable of entering into a contractual

agreement. ``The basic terms of the presubscription definition

preclude reliance on ANI either to create or provide evidence of a

valid presubscription or comparable arrangement, because ANI

identifies only the originating line and not the caller who seeks to

establish an arrangement. Thus billing systems based solely or

primarily on ANI do not ensure that presubscribed information

services charges are being properly assessed.'' Letter dated June

15, 1994, to Randal R. Collett, Association of College and

University Telecommunications Administrators, from Gregory A. Weiss,

Acting Director, Enforcement Division, FCC.

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Proposed definition of ``presubscription agreement.'' Because the

presubscription exception to Rule coverage circumvents the TDDRA

protections, the Commission believes the exception should be carefully

delineated and not be a source of abusive and deceptive practices. The

proposed Rule modifies original Section 308.2(e)(1) to make it clear

that the disclosures must be provided to, and the agreement must be

reached with, the consumer who will be billed for the service. In

addition, the proposed Rule

[[Page 58538]]

will require that presubscription agreements be delivered, in writing,

to the person who will be billed for the service.\136\ As explained

above, Section 308.2(i) of the proposed Rule requires that the provider

of presubscription services deliver (to the person who will be billed

for the service) a PIN, together with a written disclosure of all the

material terms and conditions of the agreement. In every instance, an

actual contractual agreement with the person to be billed for the

service must be reached in advance of the provision of service and the

person to be billed for the service must have received clear and

conspicuous disclosure of the material terms of the contract.

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\136\ While this should prohibit the instantaneous sale of

audiotext over toll-free numbers, the Commission believes that 900

numbers, not toll-free numbers, should be the proper vehicle for

offering ``impulse'' purchases of audiotext services. See 15 U.S.C.

5711(a)(2)(F).

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The Commission has decided not to propose a requirement, advanced

by some commenters, that the written agreement be signed by the

consumer. Instead, the proposal would make it clear that the provider

who engages in a transaction pursuant to a presubscription agreement

has the burden to show that it obtained the actual authorization of the

person who was billed for the service. The presubscription agreement is

never valid (i.e., it does not meet the conditions of the current Rule

or the proposed Rule) unless the agreement is reached with the person

who will be billed for the service.

In addition to the changes to the presubscription provisions

discussed above, the proposed Rule makes two other minor modifications

to the original Rule's treatment of presubscription agreements. First,

to simplify the language of the proposed Rule, the phrase

``presubscription agreement'' has been substituted for the phrase

``presubscription or comparable arrangement.''

Second, the proposed Rule adds language in Section 308.2(j)(1) to

clarify that a presubscription agreement is an agreement to purchase

goods or services, including audio information or audio entertainment

services.

Section 308.2(j)(2)--Billing by credit card. In promulgating the

original Rule, the Commission stated that it did not appear that

Congress intended to include credit card or charge card transactions

within the regulatory framework of TDDRA. Therefore, in Section

308.2(e)(2) of the original Rule, the Commission included within the

definition of ``presubscription agreement'' those credit and charge

card transactions that were subject to the dispute resolution

requirements of the Truth in Lending Act (``TILA'') and Fair Credit

Billing Act (``FCBA'').\137\

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\137\ 58 FR at 42367.

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In the current proceeding, some industry members urged the

Commission to expand the types of billing methods that would be

permitted to constitute a presubscription agreement.

Specifically, one industry association advanced the argument that

both pre-authorized drafts \138\ and a direct billing option would

provide consumers with all of the material disclosures required by the

Rule while giving vendors more flexibility in the methods by which they

could bill consumers.\139\ Other commenters expressed concern with

respect to direct billing, noting that there was no substantive

difference between 800-number billing through a LEC and 800-number

billing through direct billing by a third party. In other words, they

believed that to allow these billing options under Section 308.2(e)(2)

of the original Rule would effectively allow a person to be charged for

a call to a toll-free number--a practice prohibited by TDDRA.\140\

These commenters expressed the belief that, if a vendor is charging for

audiotext services offered through an 800 number, there should be an

actual agreement, regardless of the billing method.\141\ Furthermore,

some commenters pointed out that they have received complaints from

consumers who were billed directly for services after they called an

800-number, but who had not understood that there would be a

charge.\142\

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\138\ By use of a pre-authorized draft (also known as a ``demand

draft'' or a ``phone check'') a seller can obtain funds from a

buyer's checking account without that person's signature on a

negotiable instrument.

\139\ TSIA at 15-16; Tr. at 473-82.

\140\ 15 U.S.C. 5711(a)(2)(F). See also, Tr. at 480-87.

\141\ Tr. at 483, 486-87.

\142\ Tr. 483-84.

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The Commission has carefully considered all of the comments and

discussion regarding presubscription agreements, and has decided to

retain in the proposed Rule the ``credit and charge card''

presubscription option in its current form, with only minor technical

changes. The Commission also has determined not to include within this

option other types of cards, such as debit, prepaid, or calling cards,

which are not subject to both TILA and FCBA.

Presubscription agreements based on a credit or a charge card are

permitted because these transactions are already subject to the legal

protections of TILA and FCBA, including the right to dispute

unauthorized charges. In the absence of the protections afforded by

these Acts, however, it is essential that the consumer who will be

billed for a service agree, in advance, to pay for the service after

receiving clear and conspicuous disclosure of all the material terms of

the agreement. Title III of TDDRA directed the Commission to promulgate

rules with requirements ``substantially similar to the requirements

imposed, with respect to the resolution of credit disputes, under the

Truth in Lending and Fair Credit Billing Acts.'' \143\ To allow a

calling card, a debit card, or other means not within the ambit of both

TILA and FCBA to substitute for an actual agreement with the person to

be billed for the service would undermine the entire purpose of the

presubscription agreement exception to the Rule. It would also

undermine the Commission's mandate to promulgate TDDRA rules

substantially similar to TILA and FCBA.

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\143\ 15 U.S.C. 5721(a)(2).

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Allowing such types of payment methods to substitute for an actual

agreement with the person to be billed for a service would also

encourage the use of so-called ``instant'' calling cards. Such cards

are often issued without any assurance that the caller obtaining the

card is authorized to arrange for a purchase to be billed to the

telephone number from which the call is being placed. Under the

proposed Rule, cards not subject to TILA and FCBA do not constitute

presubscription agreements unless they meet the requirements of Section

308.2(j)(1).

For the reasons discussed above, Section 308.2(j)(2) of the

proposed Rule retains the language of the original Rule, with only

three revisions that are dictated by the Commission's decision to

expand coverage of the Rule beyond the ``pay-per-call services''

offered through the 900-number platform. First, the proposed Rule

changes the language relating to the disclosure of a credit card number

``during the course of a call to a pay-per-call service,'' to read

``during the course of a call to purchase goods or services, including

audio information or audio entertainment services.'' This change is

designed to clarify that services billed to a credit card are purchases

made pursuant to a presubscription agreement and thus are excluded from

the definition of ``pay-per-call services.''

Second, the proposed Rule deletes the last sentence of 308.2(e)(2)

of the original Rule. This sentence made clear that providers are

prohibited from

[[Page 58539]]

charging consumers for calls to presubscribed services unless the

consumer either had entered an agreement before that telephone call, or

was paying for the service with a credit or charge card. This sentence

is no longer necessary because the proposed Rule in Section 308.2(j)(1)

prohibits providers from charging consumers until the consumer has

received, in writing, a PIN and a clear and conspicuous disclosure of

all the material terms of the agreement.

Finally, the proposed Rule clarifies that, in order for the Section

308.2(j)(2) credit card alternative to a 308.2(j)(1) presubscription

agreement to be available, the credit card must be ``the sole method

used to pay for the charge.'' The Commission is aware that some

providers request a credit card number from a consumer, but bill the

consumer by some other method--a method that is not subject to the

dispute resolution protections of TILA and FCBA.\144\ As the text of

the original Rule and its Statement of Basis and Purpose make clear,

this practice violates the Rule.\145\ The Commission proposes adding

this clause to remove any possible ground for argument, unpersuasive

though it may be, that the Rule could be construed to allow a provider

to make use of the presubscription option through the meaningless

eliciting of a credit card number without using the card to bill

charges.

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\144\ In one case recently filed by the Commission, a provider

was allegedly collecting credit card numbers from consumers

purportedly to create a valid presubscription service, but instead

allegedly billed the consumers directly, based on ANI. FTC v.

Interactive Audiotext Services, Inc., No. 98-3049 CBM (C.D. Calif.,

filed Apr. 22, 1998).

\145\ 58 FR at 42367. See Tr. at 472 (NAAG: ``I think the proper

way to construe the law is to say if you're going to acquire pay-

per-call services using a credit card, the charge ought to appear on

the credit card.'').

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Relationship to FCC Regulations. Since passage of the 1996 Act, the

FCC's regulations enacted under Title I of TDDRA have differed in some

respects from the FTC's Rule enacted under Titles II and III of TDDRA.

This is because the 1996 Act amended Title I of TDDRA to require the

FCC to amend its rules governing the obligations of common carriers

with respect to the use of toll-free numbers for audiotext

services.\146\ These amendments affected what the FCC rules require

common carriers to include in any tariff or contract relating to the

use of toll-free telephone numbers for audiotext purposes. The proposed

revision of the FTC's Rule would not conflict with any FCC requirements

for what common carriers must include in their tariffs or contracts,

and the two sets of regulations would continue to differ with respect

to their approach to audiotext services provided over toll-free

numbers.

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\146\ On July 11, 1996, the FCC published an Order and Notice of

Proposed Rulemaking to amend its Rules in accordance with the

amendments to Title I of TDDRA. ``FCC Pay-Per-Call Order and

Notice,'' CC Docket Nos. 96-146 and 93-22, and FCC 96-289, 11 FCC

Rcd 14738 (1996). The Order portion of this document amended 47 CFR

Part 64 (the FCC's pay-per-call rules) in accordance with the

mandate of the 1996 Act; the Notice of Proposed Rulemaking portion

of the document requested comment on additional proposed changes to

the FCC's rules not specifically mandated by the Act.

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Prior to the 1996 Act, the FCC's regulations pertaining to toll-

free numbers were virtually identical to the requirements imposed in

Section 308.5(i) of the FTC's original Rule: the use of a toll-free

number to charge for information conveyed during a call was prohibited,

unless the charges were the result of a presubscription or comparable

arrangement, which included (by definition) a charge to any credit card

that was covered by TILA and FCBA. With the 1996 amendments, however,

the FCC's regulations now differ from the FTC's Rule by requiring

common carriers to prohibit the use of toll-free numbers to charge for

information or entertainment unless the consumer has entered into a

written agreement. At the same time, the FCC's new rules are more

lenient than the FTC's Rule in that, under the FCC's new rules, common

carriers can permit vendors and service bureaus using the carrier's

networks to charge consumers for calls made to an 800 number in the

absence of a presubscription agreement, if the call is charged to,

inter alia, a debit card, calling card, or prepaid account. Section

701(a) of the 1996 Act is silent as to TILA and FCBA coverage of

transactions by these means.

A number of commenters suggested that the Commission amend its

original Rule \147\ to track the amended FCC regulations.\148\

Commenters advanced several arguments in support of such a

modification. Several commenters supported tracking the FCC's amended

rules so that the Commission's Rule would allow providers other methods

to bill for toll-free audiotext services besides obtaining an explicit

``presubscription'' agreement or charging the service to a credit card

which is subject to TILA and FCBA.\149\ Other commenters favored such a

modification because it would reinforce the FCC's requirement that

presubscription agreements be in writing.\150\ Finally, some commenters

argue that amending the FTC Rule to track the FCC's regulations would

serve the goal of regulatory consistency; industry would only need to

look to one set of rules.\151\

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\147\ Specifically, these commenters supported amending Sections

308.2(e) and 308.5(i) of the original Rule--the provisions dealing

with presubscription agreements and the use of toll-free numbers for

audiotext purposes.

\148\ AT&T at 5; ISA at 31-33; NAAG at 11; PMAA at 4, 15; SW at

3, 10; TSIA at 19.

\149\ ISA at 32-33; PMAA at 15.

\150\ NAAG at 11; AT&T at 10. SW specifically opposed tracking

the new FCC regulations with regard to its allowance of an

``electronic'' signature. Such a form of written agreement, the

commenter argued, would not provide a method of verifying that the

execution was by a competent adult who is the person responsible for

paying the telephone bill. SW at 5.

\151\ AT&T at 5-6; ISA at 31-33; PMAA at 4, 15; SW at 3, 10;

TSIA at 19.

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Regulatory consistency is an important goal. This is one of the

primary reasons why, in promulgating the original Rule, the FTC chose,

at its own discretion, to adopt a provision that paralleled the

analogous FCC provisions regulating the use of 800 numbers \152\ and

defining ``presubscription or comparable arrangement.'' \153\ However,

were the FTC to adopt a definition of ``presubscription agreement''

that tracked the FCC's new definition, or if it were to similarly

modify the Rule's provisions governing toll-free numbers, it would not

be possible to achieve the explicit purposes of Titles II and III of

TDDRA as amended by the 1996 Act.\154\

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\152\ 58 FR at 42387.

\153\ Id. at 42367.

\154\ In fact, the 1996 Act's amendments to TDDRA virtually

mandate divergence between the FTC and FCC regulations. Under Title

I of TDDRA, the FCC's regulations continue to operate under the

statutory definition of ``pay-per-call services'' set forth in 47

U.S.C. 228(i). However, under Title II of TDDRA, as amended by the

1996 Act, the Commission may adopt an alternative definition of

``pay-per-call services.'' Thus, after the 1996 Act, the FCC and FTC

Rules are now focused on two different categories of ``pay-per-call

services.'' In the current legal framework, an attempt to produce

parallel Rules under Titles I, II, and III of TDDRA would be futile.

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There is no inherent conflict between the FCC's new regulations and

the FTC's original or proposed Rule. The FCC's Title I regulations

apply only to common carriers in their role of providing basic dial

tone and transport service to service providers that use toll-free

numbers, while the FTC's regulations under Title II of TDDRA directly

apply to vendors and service bureaus who would be using toll-free

numbers to charge a consumer for audio information or entertainment.

Furthermore, there is nothing in the FTC's proposed Rule to prevent a

vendor from offering to accept payment by means of a card not subject

to TILA or FCBA, as long as the vendor reaches

[[Page 58540]]

a presubscription agreement with the person to be billed for the

service and complies with the requirements of proposed Section

308.2(j)(1).\155\ Thus, it is entirely possible to use any of the

billing mechanisms permitted under Title I of TDDRA, as amended, as

long as the provider complies with the additional precautions of

proposed Rule Section 308.2(j)(1), which are designed to ensure that

the party being billed for the toll-free audiotext service is the same

person who agreed to be billed for that service.

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\155\ In fact, many of the billing options permitted by the

FCC's rule (e.g., a calling card) might easily fall within the

Commission's proposed definition of PIN.

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It is the mandate of the FTC, acting under Title II and III of

TDDRA, to prohibit the use of unfair or deceptive practices in the

provision of audiotext services.\156\ Title I of TDDRA gives the FCC no

similar mandate. The FTC must consider the extent to which any proposed

new exemption from the Rule (such as the exemption embodied in the

revised FCC rules) would be likely to increase the types of unfair and

deceptive practices that prompted enactment of the TDDRA. There is

evidence on the record suggesting that audiotext services purchased

using these billing methods--methods that would be permitted if the FTC

Rule tracked the revised FCC rules--are susceptible to the same types

of unfair or deceptive practices that are prohibited by the original

Rule. To fulfill the mandate of Section 701(b) of the 1996 Act, it is

necessary for the FTC's Rule to cover these purchases.\157\

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\156\ 15 U.S.C. 5711(a)(1), 5711(a)(4), and 5721(a)(1).

\157\ See, e.g., NCL at 3-5; FLORIDA at 8, Attachments A44-A60;

NAAG at 11; SW at 2, 5-6; Tr. at 194, 471-84, 498-500.

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Amending the FTC Rule to parallel the revised FCC rules would also

undermine the FTC's mandate under Title III of TDDRA to promulgate

rules that impose requirements that are ``substantially similar to the

requirements imposed, with respect to the resolution of credit

disputes, under the Truth in Lending and Fair Credit Billing Acts.''

\158\ The FCC's regulations are not subject to a similar mandate. The

Commission believes that it is consistent with the regulatory framework

of TDDRA that FCC and FTC regulations differ with respect to the

requirement that billing alternatives to presubscription agreements be

subject to TILA and FCBA.

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\158\ 15 U.S.C. 5721(a)(2).

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(9) Section 308.2(n)--Service bureau--Background. One of the more

significant changes in the audiotext marketplace since the promulgation

of the original Rule is that service bureaus now play an important role

for many vendors in providing access to billing and collection systems.

Some service bureaus act as ``billing aggregators''--i.e., they act as

intermediaries between vendors and LECs in order to get their client-

vendors' charges to appear on telephone bills. Other service bureaus

bypass the LEC billing system completely and provide their clients with

direct billing services. Still other service bureaus have played an

essential role in the growth of international audiotext by entering

into revenue-sharing agreements with foreign telephone companies, and

then providing vendors of audiotext services with international numbers

through which their audiotext services can be accessed.\159\

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\159\ Some of these new types of service bureaus have played key

roles in the new deceptive and unfair practices that have injured

consumers. For example, one service bureau providing international

audiotext programs to willing vendors proudly boasts ``no

chargebacks'' in its advertisements--underscoring both the potential

harm to consumers caused by international audiotext, as well as the

essential role service bureaus play in making international

audiotext possible.

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Proposed definition of ``service bureau.'' The Commission proposes

several changes to the definition of ``service bureau'' reflecting the

fact that the role of the service bureau has expanded since the

original Rule was promulgated. The proposed definition of ``service

bureau'' is also more specific than the definition of that term in

Section 308.2(i) of the original Rule. The original definition of

``service bureau'' was open-ended--i.e, it was defined as a person

``who provides, among other things, access to telephone service and

voice storage, to pay-per-call providers.'' \160\ By contrast, the

proposed definition will define a service bureau as a person who

provides one or more of a finite list of services to vendors. This

format will provide better guidance to industry and law enforcement in

determining which entities are service bureaus and will clarify that

billing aggregators and entities providing access to international

audiotext payment systems are covered by the definition.

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\160\ 16 CFR 308.2(i). [Emphasis added.]

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The proposed definition of service bureau is intended to

incorporate all of the essential services that a vendor might need in

setting up a business selling products or services through telephone-

billed purchases. Section 308.2(n)(1) of the proposed Rule identifies

the following services: voice storage, voice processing, call

processing, billing aggregation, call statistics (call and minute

counts), call revenue arrangements (including revenue-sharing

arrangements with common carriers), or pre-packaged pay-per-call

investment opportunities (i.e, ``turn-key programs''). Any person

providing one or more of these services to vendors will be covered by

the proposed definition of service bureau.

Billing aggregators are explicitly included in the proposed

definition of service bureau. As the Commission's enforcement

experience has demonstrated, billing aggregators play a key role in

providing to vendors--including unscrupulous ones--access to a

telephone billing and collection system that permits vendors to cost-

effectively bill and collect for their services. In many, if not most

cases, they are the entity responsible for submitting the charges to

the LECs for placement on consumers' telephone bills. Thus, the Rule's

purposes would be thwarted unless billing aggregators were brought

explicitly within the ambit of the Rule. Similarly, service bureaus

that facilitate revenue-sharing arrangements between vendors and

foreign telephone companies in connection with international audiotext

are included in the proposed definition. This service bureau activity

is essential to vendors seeking to sell audiotext in a manner that

circumvents the consumer protections guaranteed by Title III of TDDRA.

In the original Rule, the definition of ``service bureau''

contained an exemption for all common carriers.\161\ In its Request for

Comment, the Commission asked whether it was still appropriate for the

definition to exclude all common carriers, regardless of the activities

they perform.\162\ Several commenters urged the Commission to reexamine

this common carrier exemption, arguing that the service being provided,

and not the type of entity that provides the service, should determine

whether an entity is subject to the Rule.\163\ One commenter argued

that the common carrier exemption enabled service bureaus to claim

``common carrier'' status to evade regulation, thereby gaining a

competitive advantage.\164\ The Commission is persuaded by these

arguments. Therefore, under the proposed Rule, any person, including a

common carrier, who provides the

[[Page 58541]]

services listed in 308.2(n)(1) to vendors would be considered a service

bureau.

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\161\ 16 CFR 308.2(i).

\162\ 62 F.R. 11753 (Mar. 12, 1997).

\163\ NCL at 4; NAAG at 10; TSIA at 19-20.

\164\ TSIA at 19-20.

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Nevertheless, the Commission recognizes that there is one key

service bureau function--providing access to telephone service to

vendors of pay-per-call services--that cannot be fairly applied to

common carriers. This service, which was identified in the original

definition of service bureau, is essential to any pay-per-call service.

Indeed, it is a key function of those service bureaus who obtain

international telephone numbers for vendors who wish to provide

international audiotext services. However, a common carrier that merely

provides a vendor of pay-per-call services with access to basic

telephone service (the essential function of a common carrier) should

not be considered a service bureau subject to the Commission's Rule

promulgated under Title II and III of TDDRA. Acting as traditional

common carriers, these entities are already subject to the regulations

of the FCC promulgated under Title I of TDDRA. Therefore, the

Commission proposes a limited exemption from the definition of service

bureau for common carriers that provide vendors of pay-per-call

services with nothing more than access to telephone service. Under

proposed Section 308.2(n)(2), any person, other than a common carrier,

who provides access to telephone service to vendors of pay-per-call

services,\165\ would be considered a service bureau.

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\165\ It is important to note that proposed Sec. 308.2(n)(1),

unlike Sec. 308.2(n)(2), applies to all vendors, and is not limited

to vendors of pay-per-call services.

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(10) Section 308.2(q)--Telephone-billed purchase. The term

``telephone-billed purchase'' defines those products and services that

are covered by the dispute resolution provisions of the Rule

promulgated under Title III of TDDRA. The term is much broader in scope

than the term ``pay-per-call services,'' the category of services

covered by Title II of TDDRA. The original Rule's definition of

``telephone-billed purchase'' comes from Title III of TDDRA,\166\ and

it currently includes ``any purchase that is completed solely as a

consequence of the completion of the call or subsequent dialing, touch

tone entry, or comparable action of the caller.''\167\ The term

specifically excludes all local exchange or interexchange telephone

services, as well as other services excluded by FCC regulation. Thus,

any purchase of a product or service (other than telephone toll

service) that results in a charge to a consumer or an account

identified by reference to ANI is included in the current definition,

and any person billed for such a purchase would be entitled to dispute

the charges pursuant to the Commission's Rule.\168\

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\166\ 15 U.S.C. 5724(1).

\167\ Section 308.7(a)(6) of the original Rule.

\168\ Services provided pursuant to a presubscription agreement

are excluded from the definition. 15 U.S.C. 5724(1)(A), 16 CFR

308.7(a)(6)(i).

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Background. At the time the original Rule was promulgated, 900-

number services were the primary, if not the only, familiar example of

telephone-billed purchases. Today, the growing use of ANI as a basis

for billing consumers has increased the range of available telephone-

billed purchases. Consumers can purchase voice mail, Internet access,

telephone equipment, roadside assistance club memberships, and other

goods and services and have the charges billed to their telephone bill.

Concurrent with this development, there has been a sharp increase in

complaints about telephone-billed charges for such goods and

services.\169\ Consumer organizations, as well as federal and State

regulatory and law enforcement agencies, have received a large number

of complaints from consumers who have found unclear or unexplained

monthly recurring charges on their telephone bills for services that

were never authorized, ordered, received, or used.\170\ These

unauthorized charges (i.e., ``cramming'' charges), are often

purportedly for club memberships, or subscriptions for psychic,

personal, travel, or 900-number services. In other instances, the

charges involve services such as personal 800 numbers, voice mail,

paging, and calling cards.

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\169\ SW at 7-8; NCL at 4; Tr. at 382-84, 498-504. For example,

NCL reported that most of the complaints received by the NFIC that

relate to 800 numbers involve calls that the consumer thought were

free, but by making them, the consumer had unknowingly signed up for

services which resulted in charges (such as voice mail or club

memberships).

\170\ Tr. at 498-500.

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The common thread in all of these types of cramming charges is that

a consumer is identified, and a billing statement is transmitted, based

on a telephone number. In other words, in all of these instances, a

telephone number was used in the same manner that a credit card account

number might have been used in the past.\171\ While consumers have for

a long time had numerous rights to dispute unauthorized or other

incorrect charges to their credit card numbers,\172\ until 1992 they

had no comparable rights to dispute charges for products and services

billed to a telephone number. Title III of TDDRA was specifically

designed to address this problem; Congress instructed the Commission to

prescribe rules establishing a dispute resolution procedure for

telephone-billed purchases that are ``substantially similar'' to the

dispute resolution protections afforded credit card users under TILA

and FCBA.\173\

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\171\ FCC Public Forum on Local Exchange Carrier Billing for

Other Businesses (June 24, 1997). Transcript, pp. 232-237.

\172\ 15 U.S.C. 1666.

\173\ 15 U.S.C. 5721(a)(2).

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Proposed definition of ``telephone-billed purchase.'' The original

Rule definition of ``telephone-billed purchase'' covered all (non-toll)

charges resulting from ANI capture. This includes many, but not all,

instances of cramming.\174\ It does not cover instances of cramming,

for example, where a phone call is never made in connection with a

charge, yet the charge is billed to the consumer's telephone bill.\175\

Proposed Section 308.2(q) expands the definition of telephone-billed

purchase to include all purchases that are ``charged to a customer's

telephone bill,'' even if the purchase did not involve a telephone

call.

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\174\ As discussed elsewhere in this Notice, the Commission

proposes several modifications to the Rule to provide greater

protection to consumers who have been ``crammed'' (for example,

proposed Secs. 308.2(b)(9)-(11)) and to prohibit vendors, service

bureaus, and billing entities from engaging in cramming (proposed

Sec. 308.17).

\175\ In at least one case where unexplained or unauthorized

charges did not result from a telephone call, a deceptive prize

promotion allegedly was used to market a voice mail service.

Allegedly, consumers were enticed to fill out a sweepstakes form for

a chance to win a new vehicle or a sum of cash. The form failed to

adequately disclose that the vendor interpreted the submission of a

completed entry form as authorization to bill charges for a

``membership'' to the telephone number listed on the form. In many

instances, consumers allegedly were unaware that they had signed up

for this ``membership''; in other instances, consumers allegedly

found they were being billed for services because someone else had

filled out the form and put down their telephone number. FTC v. Hold

Billing Services, Ltd., No. SA98CA0629 FB (W.D. Texas, filed July

19, 1998).

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Title III of TDDRA was intended to provide telephone-billed

purchases the same types of protections afforded to credit card

purchases under TILA and FCBA. The telephone number, in telephone-

billed purchases, is analogous to the credit card number. To carry the

analogy further, instances of ``non-ANI cramming,'' such as a charge

resulting from entry of a consumer's telephone number on a sweepstakes

entry form, are much like instances where a consumer's credit card

number is used in a transaction where the physical card is not itself

presented. In the credit card environment (under TILA and FCBA), the

fact that a transaction takes place without the presence of the actual

card would not affect the cardholder's right

[[Page 58542]]

to dispute an unauthorized charge. By contrast, in non-ANI cramming, a

consumer loses his or her right to dispute the charge simply because

the telephone was not actually used in the transaction. In this

respect, the Commission's Rule is no longer ``substantially similar''

to the rights afforded by TILA and FCBA.

Congress has given the Commission significant flexibility in

prescribing regulations that are ``necessary or appropriate'' to

implement the provisions of Title III.\176\ The Commission has broad

authority to prohibit unfair or deceptive practices that ``evade'' its

dispute resolution rules or otherwise ``undermine the rights'' Congress

gave to consumer

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