Terms of the Proposed Settlement

The proposed settlement has five parts. The first calls for the respondents⁷ to make payments to the Commission totaling $2,950,000 over a 24-month period. The second part requires $50,000 of this total to be set aside to pay restitution, with approximately $35,000 being paid to eligible customers and $7,825 going to Rosenthal, the settlement claims administrator, as its fee.

Third, the settlement agreement provides that for a two-year period following its approval by the Commission, the named respondents will abide by the "Call Unit Marketing and Sales Compliance Program" included in the FCC TCU Consent Decree. Fourth, respondents have agreed that if their FCC operating authority is revoked as a result of the Order to Show Cause issued by the FCC in April 2003 in connection with respondents' "Winback Campaign,"⁸ they will relinquish the CPCNs granted to them by this Commission and cease operating as telephone corporations within California. Finally, if the settlement agreement is approved, CPSD agrees to withdraw its protest in A.01-12-013 so that Blue Ridge's application to provide facilities-based and resold competitive local exchange services in California can be resolved as an "unopposed application." The settlement agreement also provides that in consideration of the parties' acceptance of these terms, "the Commission agrees to end its investigation and close the docket in I.02-05-001," and that "by agreeing to this Settlement, the Respondents admit no fact, law, or violation." We will discuss these provisions in turn.

As to payment of the settlement sum, the agreement provides that within 45 days after the Commission's decision approving the settlement, respondents will furnish two checks: one for $500,000 payable to the Commission (for deposit into the General Fund), and a second for $50,000 payable to Rosenthal. (¶1.2.) Within each three-month period following this initial payment, the respondents agree to deliver another check payable to the Commission in the amount of $300,000, "until the Respondents' installment payments to the Commission accumulate to $2.95 million." (¶1.3.)⁹ The agreement also provides that the respondents waive any "potential, residual, or current" claim or interest to any of the settlement funds, "except if this Settlement is rescinded or its approval by the Commission [is] vacated." (¶1.4.) Upon payment of the full $2.95 million, the respondents will be released from liability for "all costs, direct or indirect, presently known or unknown, accruing to or incurred by the Commission" in connection with this investigatory proceeding. (¶5.2.)

Many provisions in the settlement agreement concern the settlement claims process and the duties of Rosenthal. First, respondents agree to execute the fee agreement with Rosenthal within the same 45-day period in which they must deliver their first two checks to the Commission.¹⁰ (¶2.1.) Rosenthal agrees to establish an escrow account into which the $50,000 check will be deposited, to segregate the amount representing its fee, and to inform CPSD that the account is open and that the restitution process can proceed. (¶2.2.) Within 10 days after such notification, CPSD agrees to furnish Rosenthal with the name, address, telephone billing number and other appropriate data for each of the approximately 1400 customers who are considered "Eligible Consumers" entitled to a restitution payment.¹¹ (¶2.3.) Within 30 days after receipt of this data from CPSD, Rosenthal is obliged to distribute the restitution checks (each in the amount of $25) to the Eligible Consumers, along with an explanatory statement from CPSD. (¶¶2.4, 3.2.)

There is a time limit on the restitution checks. They expire 90 days after the date printed on the check, and if a check is undeliverable or the Eligible Consumer fails to deposit or cash the check within the 90-day period, Rosenthal "will cancel the Restitution Check and attempt no redelivery." (¶3.3.) The settlement agreement also provides that within 130 days after the last restitution check is mailed, Rosenthal will pay the amount representing uncashed checks to the Commission. (¶4.1.)

As a corollary of this obligation, Rosenthal is obliged to furnish the Commission with a final report covering its work from the date the escrow account is established until the time the restitution process is complete. Rosenthal's report is to set forth the balance in the escrow account for each month from the time it is opened, and to report by month on the number of restitution checks that (1) have been mailed, deposited or cashed, (2) have expired, or (3) have been returned as undeliverable. (¶4.2.)

As noted above, the third major part of the settlement is an agreement that for two years following its approval by this Commission, the respondents will abide by the "Call Unit Marketing and Sales Compliance Program" included in the FCC TCU Consent Decree. (¶6.1.) Under this program,¹² the respondents agreed with the FCC to undertake a variety of measures designed to ensure that the abuses associated with the marketing and billing of the TCU program would not recur.

The FCC compliance program requires, among other things, that (1) the compliance program must be reviewed and implemented by legal counsel knowledgeable in both consumer protection and telecommunications law, (2) such counsel must also review, edit, and approve all materials used for marketing, advertising, or training in connection with the TCU methodology, and (3) all officers and directors, and all managers and employees involved with marketing and customer service, must be informed of the FCC consent decree and furnished with written instructions regarding their responsibilities for implementing it. In addition to these requirements, all marketing management personnel must receive annual training on the TCU compliance program and a related code of conduct (which all marketing employees must sign), and the respondents are obliged to take appropriate disciplinary action against any employee or agent found to have engaged in intentionally deceptive conduct in marketing or selling any TCU program.

As previously stated, the fourth major component of the settlement is an agreement by respondents that in the event their FCC operating authority is revoked as a result of the Winback Order to Show Cause issued on April 7, 2003, they will surrender the CPCNs granted to them by this Commission and cease doing business as telephone corporations in California. (¶6.2.)

The Winback Order to Show Cause dealt with respondents' so-called Winback Campaign, a marketing campaign that the Order to Show Cause characterized as "an apparently misleading scheme to trick consumers into returning to the Companies' services."¹³ However, this FCC proceeding has not resulted in the revocation of any FCC operating authority, because on October 29, 2003, the ALJ assigned to the matter issued an order approving a consent decree (Winback Consent Decree) entered into by the respondents and the FCC's Enforcement Bureau.¹⁴ Under the Winback Consent Decree, the respondents (1) have agreed to stop engaging in specific practices that were alleged to be misleading in the context of the Winback Campaign, (2) have agreed to adopt a special code of conduct dealing with attempts to win back customers, and (3) have agreed to engage in an extensive training program for all current and future employees involved with Winback efforts, including all telemarketing representatives, managers, supervisors, and agents.¹⁵ In addition to these obligations, and in consideration of the FCC's agreement to close the Winback Order to Show Cause proceeding, the respondents have agreed to make a "voluntary contribution" of $1.2 million to the U.S. Treasury.¹⁶

As noted above, the final part of the settlement agreement that CPSD and respondents have negotiated is an undertaking by CPSD to withdraw the protest it filed on February 8, 2002 in connection with A.01-12-013, Blue Ridge's application to provide facilities-based and resold local exchange services in California. The key provision of the settlement agreement on this issue is ¶5.10, which states in full:

"Within 30 days after the Issuance Date [of the Commission decision approving the settlement,] CPSD will file with the Commission a withdrawal of its presently pending protest to A.01-12-013 regarding Blue Ridge. CPSD agrees that it will not protest an application filed by Respondents or any of their affiliates pursuant to Sections 851-854, 1001, or 1013 based on the investigation or allegations in this matter."

Other provisions in the settlement address such things as cooperation with law enforcement agencies and the effect of any changes the Commission might order in the settlement agreement. For example, while CPSD has agreed that it will "initiate no enforcement action [and] seek no administrative or other penalties against the Respondents based on the evidence in this case," CPSD reserves the right to provide information to, or to cooperate with, law enforcement agencies, courts of law or other federal or state administrative agencies in any investigation relating to the issues here. (¶¶5.6, 5.7.) If the Commission wishes to modify any provision in the settlement agreement, all parties have 15 days within which to file a written objection to the proposed modification, and if that objection is not withdrawn within 10 days thereafter, the settlement will be deemed rescinded, and the respondents will be entitled to the return of any settlement funds they have already paid. (¶¶7.3, 1.4.)¹⁷

Finally, enforcement and breach are the subject of several provisions in the agreement. ¶5.1 provides that "each material breach of this Settlement will constitute a separate violation and will entitle the Commission to take any necessary action to enforce its orders." Similarly, although CPSD has agreed not to initiate enforcement actions or seek penalties against the respondents based on the facts of this case, this limitation "will not apply if the Respondents jointly or severally materially breach this Settlement or violate the Commission order approving it." (¶5.6.)

⁷ The settlement agreement states that the respondents entering into it are NOS, ANI, and NOSVA. No mention is made of Michael Arnau, Joseph Koppy, Kenneth Kirkpatrick or Robert Lichtenstein, each of whom was identified in the OII as an officer of NOS and/or ANI and made an individual respondent. (OII, p. 2.) Nor does the settlement agreement refer to the fact that in D.02-07-045, the decision denying rehearing of the OII, we ruled that Blue Ridge would be considered a party in this investigation. Despite these omissions, it appears that the parties' intent is that this proceeding should be terminated as to both the individual respondents and Blue Ridge. In the case of Messrs. Arnau, Koppy, Kirkpatrick and Lichtenstein, this seems clear from the May 30, 2002 motion to dismiss them as individual respondents. In the case of Blue Ridge, the parties' intent seems clear from the provisions in the settlement agreement contemplating that Blue Ridge's pending application, A.01-12-013, will be resolved. ⁸ NOS Communications, Inc., Affinity Network Incorporated and NOSVA Limited Partnership, Order to Show Cause and Notice of Opportunity for Hearing, EB Docket No. 03-96, 18 FCC Rcd 6952 (April 7, 2003). Hereinafter, this will be referred to as the "Winback Order to Show Cause." ⁹ In addition to their payment obligations, the respondents agree that within 10 days after issuance of a Commission decision approving the settlement, they will "cease or cause to cease . . . all billing, collecting, or demand for payment of any telephone billing, service fee, or outstanding balance that resulted from or was caused by" any of the unlawful conduct alleged in the OII. (¶3.4.) ¹⁰ The fee agreement attached as Appendix A to the settlement agreement provides that Rosenthal in its capacity as settlement claims administrator "will serve as the fiduciary of the Eligible Consumers in establishing, managing, and controlling the Restitution Escrow Account." ¹¹ ¶8.12 defines an "Eligible Consumer" as a California customer of one of the respondents who made a complaint to CAB between January 1, 1999 and the date on which the Commission issues its decision approving the settlement, with respect to one or more of the following issues: "the Respondents or its agents switched or caused the LEC to switch without authorization the consumer's presubscribed local, toll or long distance telephone service provider to the Respondents; charged the consumer without authorization for telephone services; or engaged in abusive marketing operations or practices." ¹² The full text of the Call Unit Marketing and Sales Compliance Program is set forth in Part IV of the FCC TCU Consent Decree, and is published at 17 FCC Rcd 26861-26863. ¹³ In the Winback Order to Show Cause, the FCC gave the following description of how the Winback Campaign allegedly worked:

"[I]t appears that NOS/ANI may have willfully or repeatedly violated section[] 201(b) of the Communications Act of 1934 . . . by conducting a misleading marketing campaign (the `Winback Campaign') apparently designed to improperly induce former customers into authorizing switches back to NOS/ANI. These improper inducements apparently included the Companies contacting their former customers and describing `problems' that the customers' chosen carriers were allegedly having in completing the customers' requests to establish new service. NOS/ANI apparently threatened their former customers with loss of service unless they agreed to retain NOS/ANI services as a `temporary measure.' Under coercion, some of these customers signed Letters of Agency (`LOAs') that authorized the Companies to be their preferred carriers, believing that doing so was necessary to keep receiving service while their new preferred carriers completed their switches. The representations of NOS/ANI to their former customers appear to be knowingly false. In reality, the consumers had already been switched to their new preferred carriers and the Companies' marketing campaign was an apparently misleading scheme to trick consumers into returning to the Companies' services." (Winback Order to Show Cause ¶2, 18 FCC Rcd at 6953.)

¹⁴ The FCC ALJ's order adopting the consent decree has apparently not been published. However, it can be found by going to the FCC's Website, http://www.fcc.gov, and clicking on "Enforcement" under Bureaus, "Orders," and then typing "NOS Communications" into the search window. ¹⁵ Many of the obligations undertaken by the respondents appear in paragraphs 9 and 10 of the Winback Consent Decree, which is attached to the FCC ALJ's October 29, 2003 order. For example, paragraph 9(b) states:

"Beginning on the Effective Date, no Winback Call will represent, suggest or imply information that: (i) the Customer will need to take action to avoid having service immediately disrupted; (ii) the Customer needs to sign a LOA to prevent the termination or disruption of service over any lines still billing with the Companies; (iii) an LOA is temporary; (iv) the Winback Call is a courtesy call; (v) the Winback Representative is not a sales person; (vi) a new LOA is required to carry a Customer's service during the interim period while a Customer's lines are being switched to a new carrier; (vii) the Winback Representative is calling from the cancel department or that the Winback Representative's job is to cancel accounts or take-down service; (viii) the Customer's request to switch carriers voids the Companies' authorization to carry the Customer's lines during the period it takes the new carrier to initiate and complete a customer requested switch; (ix) the Companies have a tariff on file with the FCC; (x) the FCC will hold the Companies liable for slamming if the Customer fails to sign an LOA to authorize the Companies to carry the Customer's service during the period it takes a new carrier to initiate and complete a Customer requested switch; or (xi) is otherwise Misleading in a material respect." (Winback Consent Decree, pp. 5-6.)

¹⁶ As the Winback Consent Decree notes, $1.2 million was also the maximum amount of the forfeiture that could have been imposed on respondents if their conduct had been found to constitute willful or repeated violations of § 201(b) of the Telecommunications Act, 47 U.S.C. § 201(b). Compare, Winback Consent Decree, ¶¶3 and 10. ¹⁷ The parties have also agreed to request that "in the decision approving this Settlement, the Commission should order full cooperation from the pertinent Billing Agents, Underlying Facilities Based Providers, LECs, and any other Persons or Corporations subject to the jurisdiction of the Commission that are necessary to implement this Settlement." (¶5.9.)