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Greenberg Traurig Alert

A Buyer's Guide to Telecommunications Services

August 1999
By Mitchell F. Brecher, Greenberg Traurig, Washington, D.C. Office

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For decades, telecommunications services, including local and long distance telephone service as well as specialized services such as private lines (dedicated connections between multiple locations of the same customer) were subject to common carrier rate regulation. Consumers would be charged the prices set forth in the service providers’ rate schedules (usually called tariffs) on file with the Federal Communications Commission ("FCC") or state public service commissions. There was no reason for customers – even large business users – to negotiate with the service providers because, quite simply, there was nothing to negotiate.

Today, telecommunications markets are open to competition and have been largely (although not entirely) deregulated. As a result, consumers now have a choice of providers and services. Customers, especially business customers with heavy telecom requirements, should be aware that telecommunications services are now negotiable. Carriers can – and do – negotiate individual deals with customers. Before negotiating a telecom deal with a vendor, customers should be aware of certain problematic areas.

1. What are term and volume commitments?

Many providers are willing to offer discounts on their services in exchange for customer commitments to purchase certain quantities of service and/or to use the provider’s service for a stated period of time – usually one to five years. In considering such commitments, customers should evaluate their current and anticipated future needs and take a realistic view of their ability to meet the threshold levels. Also, customers should study current market prices and anticipated trends in pricing. A very good price today may not look so good a year from now if prevailing industry prices have dropped, either as a result of regulatory change (for example, FCC-mandated reductions in carrier access charges), marketplace developments, or both. Customers should evaluate carefully the comparative benefits of rate certainty for specified periods of time against giving up their ability to take advantage of market price reductions during the same timeframes.

2. What is a "ramp up" period?

A "ramp up" period is a period of time that a carrier will afford a customer to reach the agreed upon usage commitment levels. For example, a contract may commit the customer to 50,000 minutes of long distance use per month, but will allow the customer 60 days to reach that level before underutilization charges apply.

3. What is "take or pay?"

"Take or pay" refers to a contractual arrangement between a service provider and a customer in which the customer commits to a stated amount of usage and is obligated to pay for that usage whether or not it reaches the levels. For example, if a contract obligates the customer to use 50,000 minutes per month and, during a specific month, the customer uses 35,000 minutes, the carrier will bill the customer for the entire 50,000 minutes. Some carriers are willing to negotiate arrangements in which customers are billed higher per minute usage rates for the minutes used if the minimum usage thresholds are not met.

4. How do early termination penalties work?

Generally, when a service provider offers a discount to a customer in return for the customer’s commitment to use the carrier’s service for a long term period, it will insist on a contract provision which requires the customer to pay an agreed upon amount if the customer terminates early. A typical early termination penalty is couched in terms of a percentage of the monthly commitment multiplied by the number of months remaining on the contract. The percentage is often negotiable.

5. What is the Filed Rate Doctrine and how does it impact telecom service contracts?

The Filed Rate Doctrine established by more than a century of Supreme Court cases holds that when a carrier provides service pursuant to a filed tariff, the terms and rates in the tariff govern the service and take precedence over conflicting contract provisions, oral representations, inducements, etc. Currently all long distance companies are required to maintain tariffs on file with the FCC. Although they may and often do negotiate contracts with customers, they remain free to change the rates or other terms simply by filing a tariff revision with the FCC. While most service providers would never agree to a contract provision which prohibits them from filing tariff changes (nor would such a provision be enforced), some will agree to provisions that allow the customer to terminate the contract or at least reduce their usage commitments if rates increase by more than a specified percentage, either during the term of the contract or per year. There are FCC cases which have held that customers obtaining service under long term contracts may challenge tariff rate increases and, upon challenge, the FCC will only permit the increases to go into effect if the carrier can show that the increases are necessitated by changed circumstances. Nonetheless, customers should not assume that a signed contract ensures rate stability over the life of the contract.

6. When must bills be paid and when do late charges apply?

Most telecommunications contracts and tariffs require that the invoices be paid by a certain due date after which late charges apply. Typically, they require that bills be paid within a certain number of days of the "invoice date." While the invoice date appears on the invoice, it may bear no relation to when the invoice is sent to the customer or when it is received by the customer. In fact, it is a common practice for carriers to send bills a week or more after the invoice date. Customers negotiating service agreements should be aware of this and attempt to obtain provisions which afford a reasonable number of days following receipt of the invoice to review the invoice and remit payment before late charges are assessed.

7. What billing dispute rights should a customer have?

In any large volume service relationship, inevitably billing disputes will occur between service providers and customers. In negotiating service contracts, customers should seek provisions which give them a reasonable opportunity to raise legitimate disputes and have them resolved before the disputed amounts must be paid. Thus, carefully-worded billing dispute provisions are critical. Carriers prefer "pay now dispute later" provisions which require customers to pay the entire billed amount on time, and then notify the carrier of the dispute. Customers prefer to retain the right to notify the carrier of the disputed amount and to avoid paying the amount in dispute pending resolution of the dispute. Many – but not all – providers will agree to allow customers to withhold disputed amounts provided that there are limitations on how long a customer has to notify the carrier of the dispute and provided further that there are agreed upon dispute resolution procedures and timeframes. It is important that customers understand their rights under the applicable contracts and tariffs regarding billing disputes. Customers should not assume that they have a right to withhold disputed amounts.

8. How is usage measured?

It is not unusual for two different carriers to quote the same per minute rate (e.g., $0.07 per minute) and charge vastly different amounts for the same amount of service. Carriers measure billed time differently. Some start the meter when calls are answered, others start timing when the dialing sequence is completed. Detailed descriptions of how billed time is measured are rarely contained in customer contracts, but often are set forth in the carrier’s tariff. Customers should ascertain how a service provider measures billed time and factor that into their analyses of the value of the deal being offered. Closely related to call measurement is the matter of billing increments. Some carriers still bill based on whole-minute rounding up ( e.g., a one-minute and five-second call is billed as a two-minute call). Others bill in 30-second, six-second, and now, even one-second rounding. Customers should determine the billing increments used by the service providers with whom they are negotiating.

9. Does the contract apply to all services, regardless of jurisdiction?

The Communications Act empowers the FCC to regulate interstate service (service between locations in one state and locations in another state) and foreign service (service between locations in the U.S. and foreign points). However, intrastate service, including local telephone service, is regulated by state governments. In negotiating service agreements, customers should understand whether the agreement and the prices in the agreement are applicable to interstate and to intrastate calling. Also, rates for service to foreign countries should be specifically identified. Customers should also be aware that some carriers will be willing to negotiate favorable prices on international calls to specific countries depending upon customer calling needs.

10. What happens if the service fails?

Although technological changes (for example, the widespread deployment of fiber optics) has dramatically   improved the quality and efficiency of telecommunications services, service failures and outages still occur. As a general rule, telecom carriers limit their liability for service failures and disruptions to issuance of credits based on the price of the service. Consequential damages (e.g. lost profits) and incidental damages (costs of obtaining alternative service) are virtually always disclaimed. However, customers taking service under contracts with volume commitments should negotiate for provisions which adjust downward commitment volumes for periods when outages preclude the customers from achieving their commitment levels. Also, customers should inquire about carriers’ planning for outage situations. Does the carrier have redundancy built into its network? What procedures does it have in place to respond quickly in the event of service disruptions. Customers whose businesses are reliant on always available, dependable telecommunications services should work with their service providers to ensure back-up capability in the event of service disruptions.

11. Who is responsible for fraudulent use of a customer’s service?

Telecommunications fraud has become a billion dollar per year industry problem. It is now possible for unscrupulous persons to access someone else’s telecommunications service from remote locations and complete calls all over the world. Most carrier contracts and tariffs state that they are not responsible for fraudulent use of the customer’s service. Carriers normally are not willing to compromise on fraud liability, but many are willing to take steps to cooperate with customers to prevent and to readily detect fraud. Customers should be aware that service providers do have the ability to use blocking and screening services and to monitor customer usage patterns for fraud. Customers should insist upon contract provisions which, at the very least, obligate carriers to take reasonable steps to prevent fraud.

Conclusion

As usage of telecommunications services increase, corporate consumers should be aware of their rights and their leverage in negotiating agreements for provision of such services. The above list of issues is illustrative, but not exhaustive, of the kinds of considerations which are relevant to successfully negotiating telecommunications service arrangements. If you have questions about telecommunications service agreements, or if you would like advice or assistance in procuring services, please contact a member of the Firm.

 

©1999 Greenberg Traurig


This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.