Procedural Background

The Order Instituting Investigation (OII) in this matter alleged that respondents NOS and ANI, both of which hold CPCNs from this Commission, had engaged in deceptive marketing, slamming, and cramming, all of which constitute violations of the Public Utilities Code. The OII generally alleged that respondents engaged in this unlawful conduct through the following means:

"They solicit new customers, primarily small and medium size businesses, by telemarketing. Respondents' telemarketers represent that telephone service will be charged on a per minute usage basis. However, customers are subsequently charged according to a `Total Call Unit' (TCU) pricing methodology that consists of usage and non-usage charges and [is] not based on cents per minute usage. Determining the TCU charges requires a conversion calculation that few, if any, customers can understand." (OII, p. 2.)

The OII noted that since 1999, the Commission's Consumer Affairs Branch (CAB) had received over 850 consumer complaints involving NOS or ANI, most of which concerned deceptive marketing, cramming or slamming based on the use of the TCU methodology. The OII noted that while NOS and ANI claimed their telemarketers disclosed the general terms of the TCU methodology during telemarketing, the complaining consumers contended otherwise:

"Consumers consistently express surprise when they discover their telephone billings are based on TCUs and exceed the per minute usage rates promised by the Respondents' telemarketing. Consumers complain that they were not informed of the TCUs before they switched to the Respondents and never authorized the TCUs. Those who have reviewed the Respondents' explanations of the TCU, find it so complicated and indecipherable as to amount to no disclosure or an apparent effort to deceive, hide, or misrepresent the Respondents' excessive rates." (Id. at 3.)

In addition to respondents' failure to disclose the terms of the TCU methodology, the OII noted that some customers had complained that after they canceled their service with NOS and ANI, they were subjected to early termination penalties and the re-rating of international calls at much higher rates than those promised by respondents' telemarketers. The OII also pointed out that respondents had been the subject of enforcement actions and lawsuits in several states because of the TCU methodology, and that the FCC had issued a Notice of Apparent Liability for Forfeiture against respondents due to the TCU.

The OII concluded that respondents' conduct appeared to violate Pub. Util. Code § 2889.5, which requires telephone corporations and their agents to "thoroughly inform the subscriber of the nature and extent of the service being offered." The OII also alleged that the conduct of respondents' telemarketers in failing to disclose and obtain customer consent to TCU pricing, call re-rating, early termination penalties, etc., should also be deemed to constitute cramming in violation of Pub. Util. Code § 2890. (Id. at 6.)

In addition to making NOS, ANI, and the officers of these carriers respondents in the proceeding, the OII directed them to provide the Commission's Consumer Services Division (CSD) with answers to certain data requests within 30 days. The OII expressly provided that CSD could continue its discovery, and would also be permitted to file motions to raise additional charges or additional respondents.

The first prehearing conference (PHC) in this matter was held on June 21, 2002. The first item of business was to rule on an emergency motion for a protective order filed by NOS and ANI, which sought to impose significant restrictions on the use of billing and other customer information that the OII had required be produced for CSD. The assigned Administrative Law Judge (ALJ) denied the motion after noting assurances from CSD's counsel that the information at issue would be treated confidentially, unless a ruling permitting public disclosure was first obtained.

The ALJ then asked for a status report on the other litigation pending against NOS and ANI, and in particular on the status of the proceedings before the FCC. Respondents' counsel agreed to provide a copy of the NOS and ANI response filed at the FCC, and to provide respondents' settlement agreement with the Florida Attorney General to the extent it was a public document.

There was also some discussion of how soon CSD expected to be able to complete its discovery and finalize the allegations and parties in the OII. After CSD counsel stated that it would probably take three to four months, and that time would also be needed to produce CAB's consumer complaint files for respondents, respondents' counsel expressed frustration that the possibility of additional allegations made the OII a "moving target." Rather than ruling on how many rounds of testimony would be allowed, or setting cut-off dates for raising additional allegations, the ALJ decided to defer such rulings and require the parties to submit status reports on their progress in completing discovery and preparing for hearing.

The final topic at the PHC was a series of motions that respondents' counsel proposed to file to address alleged jurisdictional defects in the OII. The first was a motion already filed on May 30, 2002 that challenged the propriety of naming the individual officers of NOS and ANI as respondents. The second was a motion (which, as noted below, was filed shortly after the PHC) challenging the Commission's assertion of jurisdiction over international telephone services, an action that respondents argued was barred by the "filed rate" doctrine and by federal preemption principles. The third motion concerned the extent of the Commission's power to impose fines and reparations, and whether the sanctions sought in the OII really amounted to an impermissible award of damages.

After some discussion of when these motions would be filed, the ALJ directed the parties to file two status reports. The first was to deal with CSD's progress in providing the CAB's consumer complaint files to respondents. The second was to deal with CSD's progress in completing its investigation and deciding whether to file a motion to add new allegations to the OII.²

In accordance with their representations at the PHC, the respondents did file two additional motions going to the scope of the OII. On June 28, 2002, respondents filed a motion to dismiss "any and all claims or causes of action" related to the provision of international telephone services. The motion was based on two grounds. First, respondents asserted that the services in question were subject to exclusive federal jurisdiction. Second, respondents contended that their charges were consistent with federal tariffs on file at the FCC, and that under such cases as American Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U.S. 214 (1998) and Cahnmann v. Sprint Corp., 133 F.3d 484 (7^th Cir. 1998), their marketing practices were immune from a Commission challenge under the federal filed rate doctrine.³

On July 15, 2002, respondents also filed a motion contending that under Pub. Util. Code § 2017, the Commission lacked authority to impose fines for violations of Pub. Util. Code §§ 2889.5 and 2890, the principal provisions relied on in the OII. Moreover, respondents continued, since the Commission clearly lacked authority to award damages, it could not circumvent this limitation by characterizing as "reparations" what was really a claim for damages.⁴

There were no further filings or rulings in this case during the remainder of 2002 or the first quarter of 2003. On April 17, 2003, the Commission issued Decision (D.) 03-04-053, which extended the 12-month deadline for the proceeding pursuant to Pub. Util. Code § 1701.2(d). After reciting the procedural history set forth above and concluding that the 12-month deadline could not be met, the Commission stated that "the appropriate course of action is to extend the 12-month deadline and take steps to ensure that this proceeding is either brought to hearing or settled within a reasonable period of time." (Mimeo. at 9.)

Accordingly, D.03-04-053 instructed the ALJ to hold a PHC within 90 days, at which he was to set a deadline for the submission of supplemental testimony (in the event that the discovery conducted by CPSD was complete), or to set deadlines for the completion of this discovery and the filing of any motion to amend the OII. The decision also directed the ALJ to rule on the three pending motions, unless the parties were able to reach a settlement in the meantime. (Id.) Finally, the decision pointed out that in December 2002, the FCC had adopted a consent decree pursuant to which NOS and ANI agreed to abide by various restrictions on their TCU telemarketing and training practices, and to make a voluntary payment to the FCC of $1,000,000. In exchange, the FCC agreed to terminate the enforcement proceeding it had commenced against NOS and ANI in April 2001.

The required PHC was held on June 20, 2003. The ALJ began by noting that after the issuance of D.03-04-053, CPSD had submitted 17 volumes of additional material relating to the allegations in the OII, as well as a motion to add NOSVA Limited Partnership (NOSVA) as a respondent. (PHC Transcript, pp. 66-67.) The ALJ stated that although he was inclined to grant this motion, it might not be necessary to act on it if-as the parties' PHC statements suggested-there was a realistic hope of settlement. Both CPSD counsel and respondents' counsel confirmed that they had made progress in settlement discussions, and that they were hopeful of reaching a settlement in the near future. (Id. at 69-71.) After an off-the-record discussion about the three motions by respondents discussed at the June 21, 2002 PHC, the ALJ ruled that the parties should advise him by July 21, 2003 whether they had been able to reach a settlement. In the event they had not, another PHC would be held on July 28, 2003 to set a hearing schedule. (Id. at 73, 76.)⁵

Because the parties were unable to reach a settlement by July 21, another PHC was held on July 28, 2003. After an extensive off-the-record discussion, the parties agreed on a schedule under which both parties would finish taking depositions by October 15, the respondents' testimony would be due on November 14, 2003, and hearings would be held from January 12 to 23, 2004.

This schedule became moot when CPSD informed the ALJ on August 8, 2003 that it had reached a settlement with respondents. On December 9, 2003, the parties filed a joint motion seeking Commission approval of the settlement agreement appended to this decision as Attachment A.⁶ No party has opposed the proposed settlement agreement.