IMPORTANT CLARIFICATION OF RULES GOVERNING WHOLESALERS AND RESELLERS OF TELECOMMUNICATIONS ANNOUNCED BY FCC: YOUR IMMEDIATE ATTENTION IS REQUESTED; MATERIAL ACTIONS MAY BE REQUIRED TO ENSURE COMPLIANCE AND AVOID EXPOSURE TO LIABILITIES
Yesterday, the Federal Communications Commission (“FCC” or “Commission”) released an Order clarifying wholesalers’ responsibilities under the Carrier’s Carrier Rule (“CCR”). The CCR requires a wholesale provider to treat the revenues of a reseller customer as USF assessable end-user revenues unless the wholesaler reasonably expects that the reseller contributes directly to the Fund. The FCC clarified that under the CCR, to classify revenues from wholesale services as carrier’s carrier revenues exempt from USF contributions, the wholesale provider must either have “affirmative knowledge” or a “reasonable expectation” that its customer is itself contributing to the Fund on revenues derived from those purchased wholesale services.
In the Order, the FCC has taken steps not only to clarify but to reinforce the CCR with the clear goal of reducing gaming of the system and inequitable consequences for wholesalers who rely on reseller exemptions. The Order specifically responds to a pending request for guidance from the Universal Service Administrative Company (“USAC”) as well as requests for review of Wireline Competition Bureau (“Bureau”) and USAC decisions involving the USF contribution obligations of certain wholesalers and their reseller customers.
The FCC first confirmed that to qualify as a “reseller,” an entity must both (1) incorporate purchased telecommunications into its own service offerings; and (2) reasonably be expected to contribute to the Fund based on revenues from those offerings. And, although the FCC declined to a adopt a “service-specific” exemption process, it put the burden on resellers to disaggregate or otherwise risk liability for contributions that were previously avoided due to a company-wide, non-service specific exemption.
Second, the Commission clarified how wholesalers can meet the “reasonable expectation” standard. For the first time, the FCC adopted the Bureau’s “other reliable proof” standard articulated in a 2009 Bureau Order. The Commission confirmed that the Form 499-A instructions constitute a “safe harbor,” compliance with which meets the reasonable expectation standard. If a wholesaler does not comply with the safe harbor, it can still meet the reasonable expectation standard by submitting “other reliable proof” that it had a reasonable expectation that its reseller customers would contribute directly to the USF. For the first time, the Commission also adopted a heightened evidentiary standard requiring clear and convincing evidence.
Third, the FCC provided guidance to USAC on how to treat a wholesaler’s revenues in certain circumstances. The Commission confirmed that if a wholesaler did not have a reasonable expectation that its reseller customer would contribute directly to the Fund and the reseller did not contribute directly to the Fund, the wholesaler is vicariously liable for outstanding contribution obligations of the reseller.
The Commission instructed the Bureau to modify the 2013 Form 499-A instructions consistent with the reasonable expectation standard as clarified in the Order. More importantly, the FCC directed the Bureau to subject the instructions for the first time to public notice and comment before adoption. The Commission confirmed that through December 31, 2013, reliance on the sample language in the 2012 instructions will meet the reasonable expectation standard.
It is imperative for service providers to take steps to comply with the Commission’s Order. The Order is crucial not just for wholesalers, but will have a significant impact on ALL downstream service providers of both telecom resale and information services. By the Order, the FCC sanctions the Bureau’s past violations of the Administrative Procedure Act (“APA”) and upholds its insistence on strict application of the Form 499-A instructions as “rules.” Under the guise of promoting the sustainability of the Fund, the FCC grants USAC nearly unlimited authority to reject evidence that fails to meet the “reasonable expectation” standard, and reclassify revenues accordingly. The Commission has erected a serious hurdle to relying upon anything other than the Form 499-A instructions to comply with the CCR.
Clients are strongly advised to contact the Attorney assigned to their accounts to discuss the implications of this Order and compliance measures.
