Procedural Background

The OII charged the respondents with violating several provisions of the Public Utilities Code. First, the OII alleged that CEI had changed the long distance carrier of numerous California customers without their authorization, a practice known as "slamming" that is unlawful under Pub. Util. Code § 2889.5. Second, the OII alleged that CEI had caused various unauthorized charges to be added to the customers' telephone bills, a practice known as "cramming" that is unlawful under § 2890 of the Code. Third, the OII alleged that CEI had misrepresented its relationship with local exchange carriers, in violation of Pub. Util. Code § 2889.9(a). Finally, the OII alleged that CEI had failed to comply with the Commission's rules for detariffed telecommunications carriers, even though CEI had specifically requested authority to operate as a detariffed carrier.

The OII alleged that CEI had committed these violations of the applicable statutes and rules by using the following method of soliciting customers:

"Staff's investigation reveals that a significant number of consumers alleged that they had received a marketing call from someone offering to consolidate local and long distance charges on the subscribers' local telephone bill. Consumers agreeing to consolidated billing had their service switched to Coleman [i.e., CEI], although many consumers state that they were assured by the solicitor that their long distance telephone service would not be changed. Some consumers allege that Coleman's sales representatives deceptively misrepresented themselves to be employees of, or [in] some other way associated with[,] Pacific Bell or some other telephone companies[,] and that Coleman switched their services after offering consolidated billing or PIC freeze protection to prevent unauthorized service switches, or after seeking information to verify or update the consumers' LEC records. Staff also alleges that many consumers state that they had no contact with Coleman prior to their service being switched to Coleman[,] and that Coleman's domestic rate of 25 cents a minute was three to five time[s] higher than the rate charged by the consumers' carrier of choice." (OII, p. 5.)

The OII also alleged that QAI - which provided billing, rating, and third-party verification services to CEI - had an "intricate relationship" with CEI that directly implicated it in the alleged wrongdoing. After summarizing the contractual relationship between CEI and QAI, the OII continued:

"Staff alleges QAI ultimately has control of the customers' service and determines what services customers can receive. QAI provides for the billing and third-party verification of the customers. Coleman has no rights to change the underlying service provided to these customers or to change the rates or services provided. Moreover, the financial arrangements described by CSD shows QAI with control over the revenues generated from these customers. Therefore, there is good cause to believe QAI is involved in the provision of telephone services under the Coleman name and that Coleman and QAI should be jointly and severally liable to consumers should we find violations have occurred and reparations are necessary and fines or other sanctions are imposed." (Id., at 9.)

In addition to CEI and QAI, the OII named as respondents several individuals involved in the management of CEI. These individuals consisted of Daniel Coleman (the President, Chief Executive Officer and principal shareholder of CEI), Dennis Coleman (the Vice President for Finance and Operations of CEI) and Denise Pettit (CEI's Vice President of Sales and Marketing). Two companies affiliated with CEI, American Cyber Corp. (ACC) and Small Business Billing, Inc. (SBBI), were named as interested parties. (Id. at 13.) Finally, the OII directed CEI's other service providers (including RSL COM U.S.A. Inc.) to cooperate in the investigation, and directed two of CEI's billing agents (including OAN Services, Inc.) to provide CSD with an accounting of the CEI billings attributable to California customers. (Id. at 14-16.)

A prehearing conference (PHC) was held in this matter on January 12, 2000. At the PHC, it became apparent that before addressing the substantive allegations in the OII, the Commission would have to resolve threshold motions filed by Daniel Coleman and QAI. In a motion filed on January 11, 2000, Daniel Coleman argued that the Commission lacked in personam jurisdiction over him. The basis for this motion was the asserted absence of sufficient "minimum contacts" by Mr. Coleman with California to satisfy the requirements of § 410.10 of the California Code of Civil Procedure (CCP) and the Due Process Clause of the Fifth Amendment. Accordingly, Mr. Coleman moved to quash service of process on him, and his counsel entered a special appearance at the PHC solely for the purpose of contesting personal jurisdiction, as authorized by Rule 45(c)(2) of the Commission's Rules of Practice and Procedure.

The second threshold motion discussed at the PHC was a motion to dismiss by QAI. In the Response to the OII that it filed on January 11, 2000, QAI argued that the facts alleged in the OII were insufficient as a matter of law to justify naming it as a respondent. In particular, QAI argued that it could not be held liable for the misdeeds of CEI under an "alter ego" theory, or under the alternative theory that CEI had acted as its agent. At the PHC, QAI asked the assigned Administrative Law Judge (ALJ) for leave to file a motion setting forth these contentions in detail, and the ALJ agreed. QAI's motion to dismiss was filed on January 19, 2000. ¹

At the PHC, the ALJ noted that CEI had already been the subject of disciplinary proceedings before the Federal Communications Commission (FCC) and several state public service commissions due to conduct similar to that alleged in the OII. In particular, the ALJ noted that the FCC had issued a Notice of Apparent Liability for Forfeiture in which the FCC concluded that a fine of $1,120,000 should be imposed on CEI because of its slamming and cramming activities. ² In view of this situation -- and CEI's admission in the FCC proceedings that the representations made during its telemarketing and verification procedures were misleading to some consumers -- the ALJ suggested to the respondents that their time could more profitably be spent focusing on restitution for customers rather than on issues of liability. He also noted that the cost of defending other disciplinary proceedings had likely reduced the amount that CEI would have available for restitution, and he urged CSD to take this into account in any settlement discussions. (PHC Tr. at 9-10.)