5. Penalties, Refunds, and Other
Remedies for Violations
The Commission has "full jurisdiction, control, and regulation" over ADAD operators, including COPT providers.83 As noted previously, §§ 2871-2875.5 prohibit attachment of an ADAD prior to making an application to the telephone corporation in whose service area the calls will originate, and set forth explicit restrictions for use of ADADs. These restrictions include a requirement of consent by the call recipient, a live announcement of the call, and a limit to hours of operation.
In today's decision, the Commission determined that the non-settling Respondents repeatedly violated §§ 2871 et seq. over a period of many months. Section 2876 provides that any person violating these provisions is guilty of a civil offense and subject to a fine not to exceed $500 per violation, and/or disconnection of telephone service to the ADAD. The Commission also anticipated additional remedies when it included orders for investigation into whether Calnev and 1st Capital should be required to refund any collected DAC and whether the other Respondents should have to forfeit the DAC currently held in escrow.
The non-settling Respondents have not met their burden of proof to show cause why the Commission should not penalize them and order restitution for violating § 2871 et seq. Therefore, we impose fines on Freeman and Cavallaro, order them to release their claims to the funds in escrow, prohibit them from operating COPTS or ADADs in the future, and conclude that refunds of the escrow funds are infeasible and order alternate distributions as described below.
5.1. The Parties' Positions
Non-settling Respondents offered to release their interest in the DAC funds held in escrow, although they contend that some portion of those funds in third quarter of 2007 (3Q07) arose from hand-dialed telephone calls that generated legal DAC revenue. They further argue that no additional fines or penalties are warranted because no real harm was done, they were small businesses and ignorant of the law, they intended a legitimate business rather than fraud, the Commission or one of the private vendors they dealt with should have warned them about ADAD laws, the businesses are now closed, both Freeman and Cavallaro are suffering financial hardship, Freeman has serious health problems and filed for permanent disability, and Freeman offered a new argument that any potential fines related to Calnev and 1st Capital were discharged in a 2005 bankruptcy.84 They both also argue that CPSD ignored their claims and failed to investigate them.
CPSD instead relies on the undisputed facts regarding non-settling Respondents' activities to argue that not only did they initiate a scheme to collect DAC, they knew or should have known that using payphones, with or without an ADAD, to generate DAC from unsuspecting owners of toll-free numbers was illegal. CPSD points to the large volume of calls and more than $155,000 in DAC generated to assert that the scheme defrauded the owners of the toll-free lines because the calls were made to generate DAC, rather than utilize the businesses paying the DAC.
CPSD recommended that Freeman and his companies be fined a total of $40,354.02, and Cavallaro and A&M be fined a total of $4,387.55, based on a balance of factors. CPSD also asked that the non-settling Respondents be ordered to relinquish all claims to the DAC funds held in escrow. The amounts to be returned are so small that CPSD contends refunds are administratively infeasible. In the alternative, CPSD recommends that 50% of the funds be transferred to the State's General Fund and 50% be placed in a consumer program, the Telecommunications Consumer Education Fund.
5.2. The Commission's Options
The Commission has said that a package of sanctions, including fines, should be tailored to the unique facts of each case.85 "The Commission will review facts which tend to mitigate the degree of wrongdoing as well as any facts which exacerbate the wrongdoing. In all cases, the harm will be evaluated from the perspective of the public interest."86
If a fine is imposed, it should be set at a level which effectively deters further unlawful conduct. CPSD argued that in order to avoid exorbitant fines based on a mechanical application of the $500 maximum per violation authorized by § 2876, the Commission should apply a balancing formula when weighing the large number of continuing violations. In D.01-04-035, the Commission first applied its established criteria for imposition of fines to violations of telecommunications law. The Commission has since applied the criteria to other violations of telecommunications law and we apply them here, even though non-settling Respondents are not "public utilities," because the same principles of fairness and appropriate deterrence apply.
First, we look at the severity of the offense, typically measured by the amount wrongfully obtained. Non-settling Respondents caused economic harm to over 200,000 toll-free number subscribers who incurred charges in 2007-2008 for illegal calls made not to utilize their businesses, but to generate $0.494 per subscriber call. Additional economic harm was done in 2002-2005 for illegal calls to over 130,000 toll-free number subscribers (albeit at a lower DAC rate). Excluding amounts attributed only to settling Respondents, in this case the total amounts would be $53,247.21 already disbursed, and another $92,645.75 held in escrow by G-Five, for a total of $145,892.96 in illegally generated DAC.87
Second, the conduct of the non-settling Respondents is considered. Here, they each failed to prevent, detect, disclose, or rectify the illegal use of ADADs and collection of unauthorized DAC until the aggregator declined to forward the DAC and told them their activities would be reported to the Commission. Indeed, we find that based on the undisputed facts and Respondents' statements, collection of the DAC was the primary intended result for non-settling Respondents, despite an alleged additional use to promote a telemarketing business. In addition, ignorance of the law is no excuse and their continuing assertions that "someone" should have warned them, indicates none have embraced responsibility for assuring their own actions did not violate the law.
The claims by non-settling Respondents that they undertook "due diligence" and searched the web for rules before commencement of the ADAD activities, strain credulity. A simple internet search of "automatic dialer laws" results in a 2002 website listing the ADAD laws in various states.88 Other logical searches clearly signal numerous laws limiting ADAD use.89 Furthermore, Freeman had worked with telecommunications services before, knew the FCC and Commission had some jurisdiction over the industry, and failed to make a simple telephone call to either agency to check the facts until after G-Five withheld the funds. These first two factors weigh heavily against non-settling Respondents.
We also consider the financial resources of the non-settling Respondents. Freeman and Cavallaro stated that their businesses, CSGI, A&M, Calnev, and 1st Capital, are out of business.90 Both individuals also claimed personal financial hardship. Both claim to have been out of work for some time, and Freeman stated his health problems will prevent him from acquiring work in the foreseeable future. Cavallaro stated he had been looking for work but believed that the availability of the OII on the internet had harmed his employment chances. We find these claims of financial distress to be at least somewhat credible, despite the lack of documentary evidence in support of either Respondents' financial condition. This factor weighs in favor of non-settling Respondents.
The next factor is the totality of the circumstances in furtherance of the public interest. The record in this proceeding shows a high volume of illegal calls made by the ADADs which is of substantial concern to the public. Most states have laws limiting the use of ADADs. Throughout the proceeding, CPSD argued that all of the Respondents engaged in fraud, a charge that all Respondents disputed by claiming they lacked intent to deceive and their plan included promotion of a new business. CPSD relied on the widespread illegal activity which unjustly enriched Respondents at the expense of toll-free number subscribers who automatically paid the DAC for each improper call. They also emphasized the actions taken by all Respondents to promptly get rid of all the equipment and destroy all relevant records of their operations when informed in early 2008 of the legal problems.
We agree with CPSD that the illegal calling was widespread and the actions of the Respondents in disposing of all their records and equipment looks more like destruction of evidence than acts motivated by overwhelming guilt, as asserted by Freeman. However, CPSD did not establish or argue the particular elements of actual or constructive fraud set forth in Civil Code §§ 1572-1573. Therefore, we make no such finding in this decision. Regardless of that result, we find that considering all of the circumstances, the ADAD operations were serious offenses, and if no investigation had occurred, the violations would likely have continued unabated. The public interest requires strong deterrence of future schemes of this type. Therefore, this factor favors a significant penalty for non-settling Respondents.
The final factor is the role of precedent, but the only previous ADAD case did not involve attachment to payphones to improperly generate a high volume of DAC revenue, thus, the penalty is not comparable. Application of the maximum $500 per violation to the more than 300,000 illegal ADAD calls would result in unreasonably high penalties.91 CPSD offered a penalty methodology where the call volumes are multiplied by a "reasonable" 15% penalty factor, or $0.0741 per call for illegal calls made in 2007-2008. For calls made in 2002-2005, CPSD used a 15% penalty factor of $0.036 per call based on the old DAC rate of $0.24 per call. No basis is provided for reasonableness of the 15% applied.
We agree with CPSD's approach to the penalty calculations but apply a lower penalty factor primarily due to the very distressed financial condition of Freeman and Cavallaro, but also their release of all claims to the DAC in escrow, and the fact they will be barred from future leasing of COPTs.
Freeman was clearly the initiator and coordinator of all of the illegal ADAD calls made in 2007-2008 by the payphone lines operated jointly or individually by CSGI. He admits this and said he took "full responsibility" for the actions of the other Respondents. Further, his share of the illegally generated DAC is much higher than that of the other Respondents. Freeman's activities in 2002-2005 are slightly less clear. Although Freeman claimed he was "duped" in 2002-2005 and did not control the ADADs, he and his companies were clearly integral to that earlier operation and they received the DAC, regardless of whether he had an agreement to pay out some or most of the revenue to another person. We have considered the possibility that he was initially used by another individual and do not order restitution of all of the DAC funds distributed to Freeman through Calnev and 1st Capital. However, based on his deep involvement in both periods of illegal activity, it is still appropriate that Freeman have a significantly larger penalty.
The table below illustrates the call volumes, the penalties proposed by CPSD, and the total statutory penalties resulting from a 5% penalty factor which we impose in this Decision.
TABLE B: Statutory Penalty Calculations
Respondent |
Weight |
Call Volume |
CPSD Proposed Penalty (15% factor) |
Decision Penalty (5% factor) |
Decision Penalty Dollars |
Freeman |
|||||
CSGI |
100% |
112,175 |
$ 8,312.17 |
$0.0247 |
$ 2,770.72 |
CSGI/Intella |
33% |
193,987 |
$ 4,786.69 |
$0.0247 |
$ 1,595.56 |
A&M |
50% |
118,417 |
$ 4,387.35 |
$0.0247 |
$ 1,462.45 |
CSGI/LSI |
50% |
79,064 |
$ 2,929.32 |
$0.0247 |
$ 976.44 |
Calnev & 1st Capital |
100% |
553,847 |
$19,938.49 |
$0.012 |
$ 6,646.16 |
Total Freeman |
$40,354.02 |
$13,451.33 | |||
Cavallaro (A&M) |
50% |
118,417 |
$ 4,387.35 |
$0.0247 |
$ 1,462.45 |
Total Freeman & Cavallaro |
$14,913.78 |
Accordingly, Freeman shall pay a fine of $13,451.33, and Cavallaro shall pay a fine of $1,462.45, to the General Fund of the State of California. The General Counsel shall take all reasonable steps necessary to locate any assets owned by these Respondents, and to obtain and enforce a judgment based on this decision.
All of the DAC funds collected and held in escrow by G-Five are unreasonable and excessive because they were generated by illegal use of ADADs without the knowledge of the toll-free number subscribers who pay the DAC. In the approved Settlement Agreements, Respondents Intella, TNT, and Jose and Barbara Quezada have each agreed to "release and/or relinquish any of their claims and/or rights to all of these funds." The non-settling Respondents have also offered to similarly release their claims to the DAC funds in escrow, but want the funds applied to any fines imposed against them. This is not an appropriate use of the DAC funds.
In the Rebuttal Testimony, Freeman and Cavallaro first asserted a right to an unspecified portion of the DAC funds held in escrow on the grounds that each made some 3Q07 calls by hand, generating DAC which they argued is not prohibited by the ADAD statutes. Their statements were unsupported by other evidence, but it is possible that some hand-made calls were made in 3Q07 before call volumes skyrocketed as a result of the ADAD use. However, we disagree that any of the DAC funds now in escrow arose from non-ADAD calls.
A review of the generated DAC (as set forth in Appendix H of the Staff Report) shows that in 3Q07, $823.50 was generated and paid to CSGI and $211.93 was generated and paid to A&M. These amounts are only about one percent (1%) of the DAC generated in 2007-2008 for these Respondents, and the funds have already been distributed to the Respondents. Therefore, it is reasonable to conclude that the DAC funds remaining in escrow arose from illegal ADAD calls and non-settling Respondents must release all of their claims and/or rights to all of the held funds.
The Commission could order the $103,193.64 held by G-Five to be refunded to the owners of the toll-free numbers called. Pursuant to § 701 and § 734, the Commission may order a public utility to make "due reparation" for any "unreasonable, excessive, or discriminatory" charge collected by a public utility. CPSD concedes that Freeman and Cavallaro are not technically "public utilities," but argue that the Commission's jurisdiction over COPTS and ADADs provides authority to order refunds where it is in the public interest. We agree.
The Commission has previously exercised its authority over COPT providers, for example, where it adopted consumer safeguards applicable to all payphones including a requirement that refunds be offered.92 In addition, the Commission has "full jurisdiction, control, and regulation" of ADAD operators pursuant to § 2871. Therefore, following the intent of § 734 to protect consumers, we find that the Commission's power extends to ordering refunds of DAC illegally generated by COPT providers who use ADADs in violation of §§ 2871 et seq. To find otherwise, would undercut the regulatory authority of the Commission in this area and result in unjust enrichment of the Respondents or their billing aggregator.
If the Commission ordered refunds, G-Five would have to reverse all payments received from the dozens of carriers and then direct the carriers to credit DAC back to each of their customers who had a toll-free line billed for DAC. CPSD contends that this option is not financially feasible because of the administrative costs associated with refunding hundreds of thousands of small amounts ($0.494/call). We agree that the administrative costs would likely exceed the amount held in escrow, and when combined with the lack of oversight, renders this option infeasible.
Unclaimed refunds are generally required by law to escheat to the State.93 However, if the refunds are impractical, the Commission has statutory authority to order an equitable remedy.94 There are several examples of the Commission's use of its broad authority to fashion a reasonable alternative where funds were distributed to public purpose programs as a result of an enforcement action.95 In other cases where it was not practical or possible to make a direct distribution to a class, the Commission has relied on the equitable remedy of "cy pres" and the funds are used for purposes other than direct compensation to the injured class.96
CPSD asked that the Commission adopt a cy pres remedy for the escrow funds to be disbursed, and suggested distribution to a consumer education fund. In D.09-10-008, the Commission considered alternative uses of undeliverable reparations funds in connection with widespread improper marketing practices and approved distribution of the funds to the Telecommunications Consumer Protection Fund (TCPF) which provided consumer education. "Were we to decline to authorize distribution of the [funds] to the TCPF, we are unsure what use lawfully could be made of the monies."97
The TCPF, operated by the California Consumer Protection Foundation (CCPF) is now closed. However, the CCPF created the Telecommunications Consumer Education Fund as a replacement. It has similar funding guidelines and will award grants to support the efforts of non-profit, community-based organizations in California to educate consumers on their rights, and to advance policies that protect the rights of consumers, with regard to their use of wireless telecom services. CPSD suggests the Commission order half of the escrow funds be distributed to the TCEF because it is a telecommunications-related fund focused on educating consumers about telecom services.98
We conclude that 50% of the funds in escrow shall be distributed to the State's General Fund, and 50% of the funds should be distributed to the TCEF as an equitable result that will benefit California consumers of telecom services.
83 § 2872(a).
84 This argument is irrelevant. Freeman does not claim that he included the Commission as a creditor in the bankruptcy case(s) and the illegal activity was unknown to the Commission at the time of the bankruptcy in 2005. Moreover, 11 U.S.C. § 523 provides that a debt which is a fine, penalty, or forfeiture payable to and for the benefit of a government agency is non-dischargeable in a chapter 7 bankruptcy.
85 D.98-12-075 (1998), 84 CPUC 2d 155, 184.
86 Ibid.
87 CPSD Opening Brief at 11, Table A at 11.
88 E.g., www.donotcallprotection.com/do_not_call_chart.shtml.
89 See, e.g., CPSD Opening Brief at 13.
90 CSGI registered as a Nevada corporation in 2006 and had its status revoked due to failure to pay registration fees. Freeman's other companies, Calnev Communications and 1st Capital, were both registered as California corporations in 2002 but have been suspended by the Secretary of State.
91 Staff Report, Appendix G (AT&T switch records for Respondents' COPT lines).
92 D.94-09-065 (1994) 56 CPUC 2d 117, 216, citing D.90-06-018 (1990) 36 CPUC2d 446.
93 Code of Civ. Proc. § 1519.5.
94 Ibid.
95 See, e.g., D.09-07-018 (Settlement with San Diego Gas & Electric Company over alleged rule violations resulted in donations to non-profit groups).
96 See, e.g., D.00-04-027 (Commission approved creation of consumer education trust in settlement of slamming charges where customers could not be located); D.98-12-084 (1998) 84 CPUC2d 517 (Commission approved creation of Telecommunications Consumer Protection Fund pursuant to a settlement with GTE California relating to abusive marketing practices); D.97-03-067 (1997) (Commission approved creation of a Community Technology Fund to address universal service goals).
97 D.09-10-008 at 15.
98 The Commission has already distributed the residual funds from the Cingular Wireless case to the TCEF.
