Soap Box: Does the Punishment Fit the Crime?

By Neil Ende

Posted: 7/2003

Does the Punishment Fit the Crime?

By Neil S. Ende, Alexandre B. Bouton and Tom K.
Sinai

Slamming.
The word itself conjures up images of
aggressive, even violent, misconduct. It is quite appropriate then that, in the
telecom world, the word has become associated with unauthorized conversion of a
consumers telephone service.

From the onset of competition in the
telecommunications industry and, particularly, since equal access became the
reality, unscrupulous carriers and marketing companies have sought to gain
financial advantage by converting consumers telephone numbers to a carrier
other than the carrier the consumer had selected. The problem has proliferated
because of the extraordinary financial gains available to the wrongdoer.

For example, marketing companies, that often are
paid a fee for each new customer obtained, have a very strong financial
incentive to falsify customer authorizations. This incentive has led marketing
companies, on their own and in concert with unscrupulous carriers, to develop
schemes to convert customers without proper authorization. Carriers, of course,
also have strong financial incentives to acquire new customers through all
available means.

To no surprise, many carriers, including many of
the largest carriers in the industry, have acted on their financial incentives.
Indeed, the extraordinary scope and duration of the slamming problem strongly
suggests that certain, and perhaps many, carriers have made a strategic business
decision to incorporate slamming both at the retail and the wholesale levels
as a centerpiece of their customer acquisition programs.

For their part, legislators and regulators at the
federal and state level have taken steps designed to deter slamming. Congress
took the first major step through Section 258 in the Telecommunications Act of
1996. Section 258 provides that [n]o telecommunications carrier shall submit
or execute a change in a subscribers selection of a provider of telephone
exchange service or telephone toll service except in accordance with such
verification procedures as the Commission shall prescribe. In addition,
through Section 258, Congress sought to take the financial incentive out of
slamming by making the slamming carrier liable to the carrier previously
selected by the subscriber in an amount equal to all charges paid by such
subscriber after such violation, in accordance with such procedures as the
Commission may prescribe.

The FCC, and to a lesser extent the states, have
adopted regulations implementing this statutory scheme. In its slamming orders,
the FCC has implemented and then revised its specific requirements requiring
carriers to acquire letters of authorization or third-party verifications
supporting the customers selection of that carrier. In subsequent orders, the
FCC increased the scope of its slamming regulations to cover both local as well
as long-distance services and to implement preferred carrier freezes which
prohibit carriers from changing a consumers preferred carrier without that
consumers express authorization to lift the freeze.

Recognizing that these measures had failed to
deter carriers from engaging in slamming, in April 2000, the FCC adopted what it
described as more aggressive new rules to take the profit out of slamming.
The rules require the slamming carrier to pay 150 percent of the amount paid by
the consumer to the authorized carrier. In implementing these regulations the
FCC, once again, hoped to take away the profit motive and thus the financial
incentive to slam.

Moreover, it is most noteworthy that, despite
these efforts, the available data reveal that slamming remains a very
significant problem. Despite the FCCs most recent efforts, in 2002, slamming
complaints rose from 767 in the first quarter to 1,001 in the second quarter, an
increase of 30.5 percent. And, more significantly, these data suggest that
incentive remains, even though the FCCs orders may have reduced the size of
the financial incentive to slam.

There are several reasons for this. First, not
surprisingly, not every consumer realizes that he or she has been slammed. In
circumstances, the slamming carrier succeeds because the consumer is unaware
that slamming has occurred.

Second, while the FCC has implemented regulations
designed to require slamming carriers to pay 150 percent of the amounts they
received from slammed customers to the authorized carrier, in many cases such
payments are never made. This is because, among other things, the carrier
alleged to have slammed has the right to dispute that allegation, requiring the
customer to file a complaint and to participate in a proceeding to resolve the
issue. The complaint process creates a substantial disincentive for customers
who report a slam, as well as their authorized carriers, to sustain the effort
necessary to obtain relief. Thus, even among those customers who realize they
have been slammed and among those who report the slam, few have the incentive to
see through the process.

Few customers report they have been slammed.
Indeed, recent data indicate only about a third of consumers who know they have
been slammed report the slam to their authorized carrier or to regulatory
authorities. The net of these circumstances is, despite the FCCs efforts,
well less than onethird of the slamming incidents are reported and far fewer
result in financial consequences for the slamming carrier. Thus, the potential
150 percent payment obligation on the minority of reported slamming incidents
that are litigated to resolution, does not come close to offsetting the
financial gains that are derived from the majority of customers who do not
report or pursue their claims. The slamming carriers are fully aware of these
facts and correctly calculate that the economic benefits of continuing to slam
far exceed any costs. As a result, the current regulatory scheme does not create
the intended financial disincentives to slam.

The failure of the current approach begs the
question of whether alternative approaches need to be considered. The weapons in
the FCCs arsenal have been limited to regulatory strictures designed to
thwart efforts to slam and monetary reimbursement and/or forfeitures for
confirmed slamming incidents. To date, carriers involved in slamming have not
been subjected to criminal penalties. Why? Like many other financial crimes,
slamming results in millions of dollars of improper charges being assessed
against and collected from telecom consumers. There also is reason to believe
that, in many circumstances, slamming is the byproduct of planned and
intentional and fraudulent conduct. Thus, one could argue slamming is no
different than many forms of conduct that are recognized and treated as criminal
and against which criminal penalties are applied.

Indeed, one could easily argue the scope and
nature of the slamming problem far exceeds other forms of conduct that results
in criminal penalties. For example, no one questions the attachment of criminal
liability to the theft of property, even of modest value. Yet, telecom carriers
can slam customers at the retail level, or entire customer bases at the
wholesale level, and in so doing steal thousands or millions of dollars, without
any fear of criminal exposure. The act is not substantively different than a
pickpocket taking a modest amount of money from millions of unsuspecting people.
The only difference is the mindset and a white collar.

The line between conduct that should be punished
through regulatory and civil remedies and conduct for which criminal sanctions
can be fuzzy one. Often, the determination is based on a range of public policy
considerations and historic factors. These considerations include the perceived
harm to the public and the need to deter the conduct at issue.

Slamming is theft, pure and simple. Its impact is
widespread and has serious financial consequences on individuals and competing
businesses. The parties perpetrating slamming often do so with the premeditated
intent to steal from thousands of customers and/or their serving carriers.
Efforts at regulatory and civil deterrence have not worked. Perhaps, the time
has come to see slamming for what it is and to apply a punishment that fits the
crime.

Neil S. Ende is founder and managing partner with
Technology Law Group LLC, a Washington, D.C.-based communications law firm.
Alexandre B. Bouton and Tom K. Sinai are attorneys with the firm. They can be
reached at [email protected].