United States General Accounting Office

GAO Testimony

Before the Committee on Small Business,

U.S. Senate

For Release

on Delivery

Expected at

1:00 p.m. EDT

Monday

October 25, 1999

TELECOMMUNICATIONS

Overview of the Cramming

Problem

Statement of Stanley J. Czerwinski, Associate Director,

Housing and Community Development Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-00-28

Mr. Chairman and Members of the Committee:

We are pleased to be at this hearing on Internet-related cramming directed

at small businesses. As you know, Mr. Chairman, cramming is the

inclusion of unauthorized, misleading, or deceptive charges on a

consumer’s telephone bill. Telephone companies can cram consumers by

adding unauthorized charges for telephone-related services, such as call

messaging. Cramming can also involve third-party vendors, who offer

products and services that are unrelated to telephone services, such as live

or recorded information about the stock market, sports, or products; chat

lines and dating services; club memberships; and services such as Internet

Web site designs.

Our statement today is based on our July 1999 report for Senator Susan M.

Collins, Chairman of the Senate Permanent Subcommittee on

Investigations, along with updated information that we obtained earlier

this month at your request.1

 Details of our scope and methodology are

found in appendix I. We will discuss three topics: (1) the extent of

cramming complaints, (2) state and federal regulatory initiatives to protect

consumers from cramming, and (3) state and federal enforcement actions

against companies engaged in cramming. We will also mention actions

being taken by major regional telephone companies to curb cramming.

In summary:

Although there is no central source for the number of confirmed cramming

cases nationwide, we were able to gather information on consumers’

complaints about cramming from state and federal regulators and major

regional telephone companies. Overall, we found that consumers’

complaints to state authorities about cramming rose dramatically from

about 850 in 1996 to nearly 20,000 in 1998. While only 3 states reported

receiving cramming complaints in 1996, the total increased to 36 states by

1998. At the federal level, cramming complaints became the fourth most

common type of written complaint received by the Federal

Communications Commission (FCC) and the second most common type of

complaint received by the Federal Trade Commission (FTC) during 1998.

Four major regional telephone companies reported to us that they

received a combined total of about 160,000 unconfirmed cramming

complaints during 1998, and a fifth company reported substantially more

than that number during 1998. The picture for 1999 is a mixture of declines

1

Telecommunications: State and Federal Actions to Curb Slamming and Cramming

(GAO/RCED-99-193, July 27, 1999).

Page 1 GAO/T-RCED-00-28
and increases, depending on the data source. Both FCC and FTC are

reporting declines in their complaint rates, as are all of the major regional

telephone companies. However, the situation at the state level remains

disturbing. Of the 38 state public utilities commissions we contacted this

month to obtain updated information on their cramming complaints, 18

reported declines in the number of complaints received, but 20 reported

either increases or no changes in the number of complaints received. In

addition, 23 of the 38 commissions noted that small businesses were being

charged for Web page designs and other Internet services that were never

authorized.

Both state and federal agencies are taking steps to protect consumers

from cramming. Most state public utilities commissions told us that they

provide consumers with information on ways to prevent cramming and

have administrative procedures for resolving complaints about telephone

billing. In addition, 18 of the 38 state public utilities commissions we

contacted this month reported enacting or proposing new rules designed

to combat cramming. At the federal level, FCC has developed consumer

information about cramming and streamlined the process by which

consumers can file complaints. In addition, FCC adopted a new order in

April 1999 requiring telephone companies to format their bills so that

consumers can more easily identify any unauthorized charges. Key parts of

this order are scheduled to become effective on April 1, 2000, though some

outstanding issues raised by members of the industry have not been

resolved. FTC also provides information to consumers about cramming and

takes their complaints. In October 1998, FTC proposed new rules for

combating cramming that, among other things, would require a

consumer’s express authorization before charges other than for local or

long-distance calling could be placed on the consumer’s telephone bill and

would allow the consumer to dispute any unauthorized charges. FTC plans

to issue a final rule this winter.

In the area of enforcement, public utilities commissions and attorneys

general in 16 states reported to us that from 1996 through 1998, they

completed 25 enforcement actions against companies or individuals for

cramming violations, resulting in over $3.5 million in penalties and

customer restitution. Eight states also reported initiating 22 enforcement

actions for cramming that had not been finalized when we conducted our

survey in early 1999. This month we learned that, since the beginning of

1999, 13 state attorneys general have reported completing an additional 22

enforcement actions, none of which were included in our July 1999 report.

These actions resulted in at least $460,000 in penalties and customer

Page 2 GAO/T-RCED-00-28
restitution. As of mid-October 1999, FCC had taken one enforcement action

against cramming, and was working with FTC on another case. FTC has

taken nine enforcement actions that have resulted in injunctions,

restraining orders, and at least $52 million in consumer credits and

restitution.

FCC and FTC are also working with the states and telecommunications

industry to curb this abuse. For example, in 1998, FCC sponsored a

workshop with industry representatives to develop a set of “best

practices” for combating cramming that telephone companies could use

in developing their own anticramming procedures. The major regional

telephone companies recently reported that they have a variety of

measures in place to combat cramming, including several of the “best

practices” developed at the FCC-sponsored workshop. FTC has also

sponsored public workshops with telecommunications representatives,

consumer groups, FCC officials, the National Association of Attorneys

General, and others to address cramming and provide additional consumer

education.

Background Cramming is the inclusion on consumers’ telephone bills of charges that

they did not knowingly authorize. Unauthorized charges can originate in a

variety of ways. For example, a consumer may call a vendor’s advertised

number to receive information or a service. Having obtained the

consumer’s name and telephone number, the vendor may then levy a

hidden or deceptive charge, even a recurring monthly charge, that the

consumer did not know about and did not authorize. A consumer’s name

and telephone number can also be obtained through sweepstakes entry

forms, which may include some obscurely worded fine print authorizing

charges to be placed on the consumer’s telephone bill. Some vendors

apparently have simply lifted names and numbers from telephone

directories to charge businesses for nonexistent services.

In order to have charges placed on a consumers’ telephone bills, vendors

typically use the services of companies called “billing aggregators,”

which bundle billing information from many vendors. Billing aggregators

contract with telephone companies to have the vendors’ charges included

as part of the consumers’ telephone bills.

The format of telephone bills can make it hard for consumers to recognize

that they have been crammed, especially when the charges are identified

only by nondescript phrases, such as “monthly fee,” “membership fee,”

Page 3 GAO/T-RCED-00-28
or “service charge.” The bills may not even clearly identify the names of

the vendors charging for these services, making it difficult for consumers

to contact them directly to have the charges explained or removed.

Both state and federal agencies are responsible for protecting consumers

from cramming and for taking regulatory and legal enforcement actions

against entities engaged in this abuse. At the state level, public utilities

commissions are responsible for regulating intrastate telephone services

and resolving consumers’ complaints, while attorneys general are

responsible for resolving consumers’ complaints about unfair and

deceptive marketing practices. At the federal level, FCC’s authority is

focused on preventing cramming by common carriers (telephone

companies) engaged in common carrier activities, while FTC’s authority is

focused on preventing cramming by companies that are not common

carriers, such as third-party vendors that charge for their services through

telephone bills. The Congress has, in some limited circumstances, granted

FTC concurrent authority with FCC to establish rules concerning certain

areas of telephone billing and collection.

Consumers who are the victims of cramming can attempt to resolve the

problem by directly contacting their telephone company or the vendor

involved. They can also file a complaint with their state public utilities

commission or their state attorney general’s office. These two state-level

bodies may attempt to resolve the complaint informally, or they may take

formal regulatory or legal action, as authorized by state statute, against the

offending company. In addition, consumers can send complaints about

cramming to both FCC and FTC. Each complaint that FCC receives is sent to

the appropriate company. The company in turn sends its response to the

complaint to both FCC and the affected consumer. On the basis of these

complaints, FCC investigates patterns of cramming and takes enforcement

actions when appropriate. FTC uses the cramming complaints it receives,

along with complaint data provided by state-level sources and other

contributors to its complaint database, to take law enforcement actions

against individuals and companies engaged in this abuse.

Cramming Complaints

to State and Federal

Authorities

The number of cramming complaints received by state and federal

agencies increased dramatically from 1996 through 1998 (see table 1). In

1996, only three states reported receiving complaints about cramming. In

1997, 16 states received a total of 1,188 cramming complaints. By the end

of 1998, 36 states had received 19,543 complaints about this abuse. The

situation is similar at the federal level. FCC and FTC have seen cramming

Page 4 GAO/T-RCED-00-28
emerge as a major problem as the number of cramming complaints to both

agencies sharply increased from 1997 to 1998. In 1998, cramming became

the fourth most common cause of written complaints received by FCC and

the second most common cause of complaints received by FTC.

2

Table 1: Number of Cramming

Complaints Reported to State Public

Utilities Commissions, FCC, and FTC

for Calendar Years 1996-98

Calendar year

Cramming

complaints received

by state public

utilities commissions

Cramming

complaints received

in writing by FCCa

Cramming

complaints received

by FTCb

1996 852 0 221

1997 1,188 0 3,173

1998 19,543 4,558 9,827

aA consumer may call FCC’s National Call Center with either an inquiry or a complaint. While FCC

keeps track of inquiries and complaints received by the Call Center for trend and analytical

purposes, it did not, until recently, take action until a consumer had submitted a written complaint,

accompanied by bills and any other supporting documentation. These FCC numbers reflect

written complaints only.

bThe numbers for FTC include complaints received by mail, telephone, and the Internet.

Sources: State public utilities commissions’ responses to GAO’s survey and data from FCC and

FTC.

The numbers in table 1 do not capture complaints about cramming that

consumers tried to resolve by dealing directly with their telephone

company or third-party vendor without filing a complaint with state or

federal authorities. At present, there is no central source of data on

verified cases of cramming. During early 1999, we contacted major

regional telephone companies to obtain data directly from them on the

number of cramming complaints they received during 1998.3

 The results

we obtained were incomplete and highly qualified. Several companies told

us that they did not begin tracking cramming complaints until the middle

of 1998 and that, in any event, their numbers represented unverified

complaints, which may prove to be unwarranted upon investigation. Four

companies reported a combined total of about 160,000 unverified

2

The data in table 1 have some important qualifications. The complaint numbers do not equate to

verified cramming incidents, since a complaint could prove to be unwarranted upon investigation. For

example, a customer might misinterpret a legitimate service charge and mistakenly complain about

being crammed. Also, adding state and federal complaint numbers together could result in some

double-counting because consumers can complain to both state and federal authorities about a single

cramming incident.

3

The regional companies consider the cramming data provided to us to be proprietary. To protect the

confidentiality of the data, we agreed to report only cumulative totals for all companies. The

companies included Ameritech, Bell Atlantic, BellSouth, SBC Telecommunications, and US WEST. We

did not attempt to gather data from hundreds of smaller local service providers.

Page 5 GAO/T-RCED-00-28
cramming complaints for all or part of 1998, and a fifth company reported

substantially more than that number.

The situation for 1999 is a mixture of declines and increases, depending on

the data source. At the federal level, FCC reported 2,929 cramming

complaints from January 1999 through September 1999, and FTC reported

5,153 cramming complaints. For both agencies, these numbers for the first

9 months of 1999 represent a downward trend from 1998 levels. Major

regional telephone companies are also reporting declines in cramming

complaint levels, according to information they provided to FCC this

summer. The companies attributed their improved numbers to actions

they have taken to crack down on cramming.

At the state level, the complaint numbers remain disturbing. We contacted

38 state public utilities commissions this month to obtain updates on their

cramming complaints. While 18 states reported declines in the number of

complaints received, 20 states reported either increases or no changes in

the number of complaints received.4

 In addition, 23 of the 38 states noted

that small businesses were being charged for Web site designs and other

Internet services that were never authorized. The offices of attorney

general in North Carolina and North Dakota have begun to track this type

of cramming as a separate category.

Consumer Protections

Against Cramming

Both the states and the federal government have taken action to help

protect consumers against cramming. Most states have some protections

against cramming, and many are making efforts to alert consumers to

cramming and provide guidance on dealing with this abuse. At the federal

level, FCC adopted a new order in April 1999 (“Truth-in-Billing”) to

combat cramming. This order requires telephone bills to clearly identify all

charges and highlight any changes in service so that consumers can more

easily spot unauthorized charges. FTC has also proposed regulatory

changes that would address cramming by, among other things, requiring a

consumer’s express authorization to charge for services other than local or

long-distance calling, enhancing the consumer’s right to dispute

4

The public utilities commissions reporting declines in cramming complaint levels were Alabama,

Arizona, Delaware, Florida, Idaho, Illinois, Indiana, Maryland, Michigan, Montana, Nevada, Ohio,

Oregon, Pennsylvania, Texas, Vermont, Wisconsin, and Wyoming. The public utilities commissions

reporting increases in cramming complaint levels were Iowa, Missouri, North Carolina, Oklahoma,

Rhode Island, South Carolina, South Dakota, Tennessee, Utah, and Virginia. The public utilities

commissions in Arkansas, Connecticut, Hawaii, Louisiana, Maine, Massachusetts, Minnesota,

Mississippi, New Hampshire, and Washington reported that the number of cramming complaints they

received in 1999 was about the same as they had received in 1998.

Page 6 GAO/T-RCED-00-28
unauthorized charges, and imposing liability on those engaged in

cramming.

State-Level Consumer

Protections Against

Cramming

In early 1999, 41 state public utilities commissions reported to us that they

had initiated some actions to help prevent cramming. These actions

included providing consumers with educational brochures and

information on Internet sites and establishing procedures for handling

cramming complaints. Some state commissions reported that they refer

cramming complaints to FCC. In addition, a few state commissions

reported taking additional actions to increase their ability to protect

consumers from cramming. For example, during 1998, Illinois passed

legislation that in part enhanced the enforcement actions the Illinois

Commerce Commission can take to protect customers from telephone

cramming. Specifically, the legislation gave the Commission the authority

to fine an offending company up to $1,000 for each repeated and

intentional cramming violation as well as revoke the company’s certificate

to provide service in the state. In addition, the Tennessee Regulatory

Authority implemented new regulations in 1998 against cramming that

require the prior consent of an authorized individual before charges for

additional services can be placed on the telephone bill. The Authority can

assess a maximum fine of $100 per day, per offense, against a company

engaging in cramming. The California Public Utilities Commission and the

Indiana Utility Regulatory Commission also recently implemented rules

detailing the types of information required before charges for other

services can be added to a consumer’s telephone bill. In addition, 18 of the

38 public utilities commissions we contacted this month stated that their

states had either enacted or proposed new rules to combat cramming.5

Federal Consumer

Protections Against

Cramming

Both FCC and FTC have undertaken rulemakings to provide consumers with

greater protections against cramming. They have also increased their

consumer education efforts and are making it easier for consumers to file

complaints about this abuse.

FCC’s “Truth-in-Billing” Order

to Help Combat Cramming

According to FCC, over 60,000 consumers made inquiries to the agency in

1998 about the confusing format of their telephone bills. FCC believes that

this confusion is contributing to the rise in cramming because consumers

are having difficulty detecting unauthorized charges. On April 15, 1999, FCC

adopted its “Truth-in-Billing” order, which establishes principles and

5

These states include Alabama, Florida, Illinois, Indiana, Iowa, Maine, Maryland, Massachusetts,

Montana, New Hampshire, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia,

and Washington.

Page 7 GAO/T-RCED-00-28
guidelines to make telephone bills easier for customers to understand.6

The new rule, which FTC commented on and supports, requires that

telephone bills (1) clearly identify who is responsible for each charge,

(2) include full and nonmisleading descriptions of the services being

billed, and (3) provide telephone numbers for consumers to call for more

information about specific charges on their bills.

This new order was originally to go into effect earlier this year. However,

in September 1999, FCC announced that the implementation date for parts

of the order was being postponed until April 1, 2000. This date applies to

compliance with the requirement that common carriers highlight new

service providers and identify deniable and nondeniable charges. All other

deadlines under the rule, including a requirement that common carriers

separate charges on bills by service provider, take effect 30 days after the

notice’s publication in the Federal Register on October 12, 1999. FCC stated

that the postponement came about because the Office of Management and

Budget raised concerns that the original implementation date could impair

the ability of some telephone companies, especially small and

medium-sized ones, to ensure that their computer systems were Year 2000

compliant.7 FCC has also received several petitions for waivers, stays, and

other forms of relief from the guidelines adopted in the order and

continues to work to resolve these issues.

FTC’s Proposed Revision to the

“Pay-per-Call” Rule

FTC is also taking action to combat cramming. Under a proposed revision

to its “Pay-per-Call” rule, FTC has laid out a fourfold approach to

cramming.8

 First, a consumer’s express authorization generally would be

required for purchases unrelated to local or long-distance telephone

service that are billed to the consumer’s telephone account. Second, a

vendor would be prohibited from placing monthly or other recurring

charges for pay-per-call service on a telephone bill without prior

6

“Truth-in-Billing and Billing Format,” CC Docket No. 98-170, FCC 99-72 (rel. May 11, 1999).

7

The Year 2000 problem is rooted in how dates are recorded and computed. For the past several

decades, systems have typically used two digits to represent the year, such as “98” for 1998, to save

electronic storage space and reduce operating costs. In this two-digit format, however, 2000 is

indistinguishable from 1900. Because of this ambiguity, date-dependent software, firmware, and

hardware could generate incorrect results or fail to operate altogether when processing years beyond

1999.

8

Under the authority of the Telephone Disclosure and Dispute Resolution Act of 1992, FTC adopted its

Pay-per-Call rule to curtail the unfair and deceptive practices engaged in by some pay-per-call

businesses. 16 C.F.R. part 308. At that time, pay-per-call services were generally provided via “900”

numbers that were billed directly to a consumer’s local telephone company. Since then,

“telephone-billed purchases” have expanded beyond simply “900” numbers. The

Telecommunications Act of 1996 authorized FTC, through its rule, to extend the definition of the term

“pay-per-call service.” On October 30, 1998, FTC published a notice of proposed rulemaking to revise

the rule. 63 Fed. Reg. 58524. Part of this revision focuses on cramming.

Page 8 GAO/T-RCED-00-28
agreement with the customer billed for the service. Third, consumers

would have the legal right to dispute unauthorized charges “crammed”

onto their telephone bills and to have these charges removed. Finally,

dispute resolution protections would be provided for all transactions that

resulted in the placement of nontoll charges on a customer’s telephone

bill. Violators would be liable for civil penalties, currently $11,000 per

violation. FTC officials currently expect to issue a final rule sometime this

winter.

Federal Complaint-Reporting

and Education Initiatives

FCC and FTC are augmenting their regulatory efforts with expanded

consumer outreach and education, which are key elements in combating

cramming. FCC is making it easier for consumers to submit complaints

about cramming. In the past, FCC required consumers to submit complaints

in writing before it took action on them. Since January 1999, consumers

have been able to file complaints electronically via FCC’s Internet Web site.

And in June 1999, operators at FCC’s National Call Center started taking

consumers’ complaints over the telephone and electronically submitting

them for action directly to FCC’s Common Carrier Bureau. In response to

each complaint, the Bureau electronically issues an “Official Notice of

Informal Complaint” to all companies identified in the complaint.9

 A

served company has 30 days to respond to FCC. FCC is also automating

some of its old manual processes for handling consumers’ complaints in

order to shorten its response time. In addition, FCC is bolstering its

customer education efforts by making information about cramming

available on its public Internet Web site. FCC is in the process of

establishing a centralized Consumer Information Bureau to be more

responsive to consumers’ concerns and requests for information. It is also

in the process of establishing a centralized Enforcement Bureau to better

marshal its resources for taking actions against entities that violate its

rules.

FTC has expanded its efforts to educate consumers about telephone billing

abuses by creating a Web page on cramming and has formed a

telecommunications working group to develop consumer education

publications. These materials emphasize that a consumer does not owe a

payment for unauthorized (crammed) services just because the call for the

service may have been placed from his or her home. In 1999, FTC added a

toll-free number for consumers to call with complaints about cramming

and other abuses and to obtain information on how to avoid such

problems. FTC’s database system, called the Consumer Sentinel, also

9

The issuance of a notice of informal complaint does not necessarily indicate wrongdoing by the

served company.

Page 9 GAO/T-RCED-00-28
contains details on over 210,000 consumer complaints on all topics,

including complaint data provided by a variety of organizations, such as

Better Business bureaus, state attorneys general, the National Fraud

Information Center, Phone Busters, and private companies. FTC uses the

database to develop enforcement strategies against companies engaged in

abusive trade practices, including cramming.10

State and Federal

Enforcement Actions

Against Cramming

Both state and federal enforcement actions against companies engaged in

cramming have resulted in financial penalties, restitution, and

discontinued operations.

Completed State

Enforcement Actions,

1996-98

As of the end of 1998, 16 states had successfully completed 25

enforcement actions against companies and individuals engaged in

cramming that have resulted in over $3.5 million in fines and other

penalties. In each of these cases, the public utilities commission and/or the

attorney general’s office participated in a formal hearing against the

violator that resulted in a final disposition or resolution of the case.

Usually, the accused company or individual was ordered to resolve the

complaint by providing consumers with some restitution, paying a penalty,

or providing an assurance that the cramming would stop. As shown in

table 2, the 16 states ordered companies to pay at least $1.7 million in

customer restitution11 and $1.8 million in penalties and fines.12 These

completed enforcement actions affected at least 42,000 consumers. These

totals, however, understate the actual outcomes of these actions because

the survey responses of state public utilities commissions and attorneys

general did not always include the number of consumers affected or the

amount of customer restitution and penalties involved.

10Over 170 law enforcement agencies in the United States and Canada also have access to this database

to assist them in their own consumer protection efforts.

11Customer restitution can include a complete or partial refund of the money consumers paid for

unauthorized services.

12Penalties and fines include charges to cover the costs of court proceedings and investigations. In

some cases, the penalties and fines were used to cover the costs of consumer education campaigns.

Page 10 GAO/T-RCED-00-28
Table 2: Completed Enforcement

Actions Taken by State Public Utilities

Commissions and State Attorneys

General for Cramming, 1996-98 State

Number of

completed

enforcement

actions

Number of

customers

affected

Total amount

of customer

restitution

reported

Total amount

of penalties

and fines

reported

California 2 30,000a $650,000 $25,000

Florida 3 2 579 21,000

Georgia 1 a

Idaho 1 5 b 1,500

Illinois 1 57 500,000 20,000

Kentucky 1 a 2,000

Missouri 2 a b c

New York 3 172 67,000b 129,000

North Carolina 1 a b 273,000

Oregon 3 a 14,350

Pennsylvania 2 a b 1,002,500

Rhode Island 1 14 400 35,000

South Dakota 1 1 229

Tennessee 1 11,878 b 280,000

Virginia 1 a 435,000 15,000

Wisconsin 1 a 40,000 25,000

Total 25 42,129 $1,693,208 $1,843,350

aThe number of customers affected was not provided in at least one of the reported actions.

bRestitution was ordered to be paid in at least one of the reported actions, but the specific amount

was not provided.

cA penalty was ordered to be paid in at least one of the reported actions, but the specific amount

was not provided.

Sources: State public utilities commissions’ responses to GAO’s survey and responses of state

attorneys general to a survey from the National Association of Attorneys General.

In addition to these completed cases, three state public utilities

commissions and five state attorneys general reported initiating 22 other

enforcement actions against entities engaged in cramming. These actions

had not been finalized when we conducted our survey in early 1999.13 This

month we learned that, since the beginning of 1999, 13 state attorneys

general reported completing an additional 22 enforcement actions, none of

13The state public utilities commissions in Florida, Maine, and West Virginia, and the attorneys general

in Illinois, Missouri, New Jersey, Ohio, and Wisconsin reported the pending cramming enforcement

actions.

Page 11 GAO/T-RCED-00-28
which were included in our July 1999 report.14 These actions resulted in at

least $460,000 in penalties and customer restitution. Four of the 38 public

utilities commissions we contacted this month also reported five more

pending enforcement actions for telephone cramming.15

Federal Enforcement

Actions Against Cramming

At the federal level, both FCC and FTC have taken enforcement actions

against entities engaged in cramming. FCC and FTC, however, operate under

different statutory schemes and generally have different remedies

available.16 As a regulatory agency, FCC has several tools for achieving its

enforcement goals. These include administrative remedies, such as

revoking a company’s operating authority, issuing a cease and desist

order, and assessing civil monetary penalties (forfeitures). As a law

enforcement agency, FTC pursues cramming in federal district courts,

seeking temporary and permanent injunctive relief and, ultimately,

restitution for affected customers. FTC can also take administrative

enforcement action, such as convening a trial before an administrative law

judge.

FCC has brought an enforcement action against one common carrier, Long

Distance Direct, Inc. (LDDI) for violations related to both cramming and

slamming. (Slamming involves switching a consumer’s telephone service

provider without the consumer’s authorization.) LDDI allegedly changed

consumers’ long distance service providers to LDDI and billed consumers

for “membership fees” simply on the basis of the consumers’ calls to a

“psychic hotline” service. In some cases, there was no evidence of

contact with the affected consumer.

14The attorneys general in Arkansas, Florida, Idaho, Illinois, Kansas, Michigan, New Jersey, North

Carolina, Ohio, Oregon, Pennsylvania, Tennessee, and Texas reported these completed enforcement

actions.

15The state public utilities commissions in Florida, Mississippi, North Carolina, and Tennessee

reported the most recently pending cramming enforcement actions.

16Under the Communications Act of 1934, as amended, FCC has general authority to prohibit carriers

that provide interstate services (telephone companies) from engaging in unjust and unreasonable

practices, such as cramming. 47 U.S.C. 201(b). FTC, under the Federal Trade Commission Act, as

amended, has the authority to pursue law enforcement actions against unfair and deceptive acts or

practices. 15 U.S.C. 45(a). Common carriers (i.e., telephone companies) subject to the

Communications Act of 1934, as amended, are exempt from FTC’s statutory mandate under the

Federal Trade Commission Act. 15 U.S.C. 45(a)(2). FTC has taken the position that the statutory

common carrier exemption does not shield the non-common-carrier activities of an entity that may

otherwise engage in some common-carrier activities under another statute.

Page 12 GAO/T-RCED-00-28
FTC has brought nine cramming cases to court since April 1998 that have

resulted in at least $52 million in consumer credits and restitution.17 These

cases involve 22 companies, including billing aggregators and vendors. In

eight cases, FTC has sought and successfully obtained preliminary or

permanent injunctions, or temporary restraining orders, to stop these

companies’ cramming activities. In addition, FTC is seeking restitution for

the unauthorized charges that these companies collected from consumers.

According to FTC officials, these unauthorized charges range from

$4.7 million in one case to almost $40 million in another case. Of the nine

cases brought to district court, four cases have been settled with

substantial redress. The case involving Interactive Audiotext Services, Inc.,

resulted in approximately $11 million in consumer restitution and

compliance provisions, including a 3-year record-keeping requirement for

the company. In the second case, involving American Telnet, Inc., the

parties have agreed to $39.7 million in consumer restitution and changes in

their business practices. In the third case, Hold Billing Services, Ltd.,

agreed to $1.6 million in consumer redress. The fourth case, which

involved unauthorized charges to small businesses for Web site services

that were purportedly free for a trial period, was just settled earlier this

month with the company, U.S. Republic Communications, Inc. The other

five cases were still in various stages of discovery and negotiation as of

October 1999. Additional details on these cases are found in appendix II.

Officials at both FCC and FTC told us that they have several additional

investigations in progress, including one joint investigation. They expect to

take more enforcement actions against cramming before the end of this

year. They also told us that they are working with their state counterparts

to efficiently combat cramming. For example, the two federal agencies

share complaint data with each other and the states. FCC and the National

Association of Regulatory Utility Commissioners are also working to

coordinate their enforcement actions and jointly disseminate educational

materials on telecommunications issues affecting consumers. Both FCC

and FTC officials told us that they regularly participate in conference calls

with representatives from the state public utilities commissions and

attorneys general, respectively, to discuss telecommunications issues,

including cramming.

17FTC’s Fighting Consumer Fraud: The Case Against Cramming, June 1999, discusses its actions

against cramming.

Page 13 GAO/T-RCED-00-28
Industry Actions to

Curb Cramming

FCC and FTC officials also noted that that they are working with members

of the telecommunications industry to curb cramming. For example, in

May 1998, FCC sponsored a workshop, attended by representatives of the

telephone industry, to develop a set of voluntary guidelines on “best

practices” in combating cramming that individual companies could

consider implementing. These best practices cover issues such as

screening products and service providers to identify programs that may be

deceptive or misleading, establishing procedures for verifying that charges

have been authorized by the consumer, and establishing a dispute

resolution process. In addition, FTC has sponsored public workshops with

industry representatives, consumer groups, FCC officials, the National

Association of Attorneys General, and others to address cramming and

provide additional consumer education.

Earlier this year, several major local and long-distance telephone

companies provided us with information on initiatives they have

undertaken to deal with cramming. Among them are the following:

• Using brochures, press releases, and Web sites to educate customers on

what constitutes cramming, what their rights are, and what steps they can

take if they have been victims of cramming.

• Limiting billing to vendors engaged in telecommunications-related

services.

• Eliminating billing for certain products and services susceptible to abuse

by third-party service providers, such as prepaid calling cards and debit

cards.

• Eliminating billing for recurring monthly service charges associated with

pay-per-call 900 number services or charges for services accessed via 800

and 888 numbers, which are widely associated in the public’s mind with

toll-free calling.

• Refusing to bill on behalf of programs that use sweepstakes or “check

box” methods to sign up customers.

• Requiring information providers to provide clearer billing descriptions,

toll-free numbers for complaints, and procedures for handling complaints.

• Requiring information providers to provide a notarized affidavit attesting

to the validity of their descriptions and billings; requiring billing

aggregators to sign an affidavit certifying that the third-party charges they

are submitting are authorized by the consumer.

The companies maintain that measures such as these (which reflect

several of the FCC workshop’s “best practices”) have been effective in

Page 14 GAO/T-RCED-00-28
combating cramming, as evidenced by the generally declining volume of

cramming complaints that they reported receiving during 1999.

Mr. Chairman, this concludes my prepared remarks. We would be pleased

to respond to questions that you and Members of the Committee may have

at this time.

Contact and

Acknowledgements

For information about this testimony, please contact Stan Czerwinski at

(202) 512-7631. Individuals making key contributions to this testimony

include John Finedore, Mindi Weisenbloom, Mike Volpe, Terri Russell,

Martha Chow, Faye Morrison, Ed Warner, and James Sweetman.

Page 15 GAO/T-RCED-00-28
Appendix I 

Objective, Scope, and

Methodology

Our objective for this testimony was to provide general background

information on cramming and efforts to combat it. We based our testimony

largely on the work we did for our recent report, Telecommunications:

State and Federal Actions to Curb Slamming and Cramming

(GAO/RCED-99-193, July 27, 1999). The objectives of that report were to

describe the (1) number of complaints about slamming and cramming

received by state and federal authorities, (2) types of protections

implemented by state and federal authorities to increase consumers’

ability to protect themselves against slamming and cramming, and

(3) state and federal enforcement actions taken against slamming and

cramming violations from 1996 through 1998.

To determine the states’ actions to combat cramming, we administered a

survey to the public utilities commissions in the 50 states and the District

of Columbia early in 1999. This survey collected information on the types

of consumer protections offered by the states, the number of cramming

complaints received, and details on each of the formal enforcement

actions taken by the commissions from 1996 through 1998. The National

Association of Attorneys General collected similar information about

formal enforcement actions taken by each state’s attorney general. We

assisted in collecting this information. In addition, we reviewed relevant

FCC and FTC documents and met with officials of these agencies to discuss

their efforts in developing regulations to combat cramming and their

enforcement actions against those engaging in this abuse. We also

contacted regional Bell operating companies and major long-distance

companies for data on cramming complaints and descriptions of their

initiatives to curb cramming.

During October 1999, we obtained updated information on cramming

complaints and enforcement actions from FCC, FTC, and 38 state public

utilities commissions. We also obtained an update on cramming

enforcement actions reported by some state attorneys general to the

Illinois Office of Attorney General. To update cramming complaint data

from major regional telephone companies, we relied on their responses to

a July 1999 request by FCC for information on their anticramming initiatives

and current complaint levels.

Our initial review, performed from December 1998 through June 1999, and

our October 1999 update were conducted in accordance with generally

accepted government auditing standards.

Page 16 GAO/T-RCED-00-28
Appendix II 

FTC’s Enforcement Actions Against

Cramming

The Federal Trade Commission (FTC) protects consumers by taking law

enforcement actions against unfair or deceptive acts or practices.1

According to FTC officials, the Telephone Disclosure and Dispute

Resolution Act (TDDRA) of 1992, as amended, gives FTC the authority to

regulate all “telephone-billed purchases” that are distinct from charges

for the transmission of local or long-distance telephone calls.2 FTC seeks

and obtains temporary restraining orders, preliminary injunctions,

permanent injunctions, and other equitable relief, such as the appointment

of receivers, to halt unfair or deceptive practices and to reserve the

offending companies’ assets for consumer restitution.

Between April 1998 and October 1999, FTC filed nine cases against 22

companies for cramming violations. In some instances, FTC entered into

court-approved settlements with the companies. Table II.1 provides details

on the publicly filed enforcement actions that FTC took during this period.

1

Common carriers (i.e., telephone companies) subject to the Communications Act of 1934, as

amended, are exempt from FTC’s statutory mandate under the Federal Trade Commission Act. 15

U.S.C. 45(a)(2). FTC has taken the position that the statutory common carrier exemption does not

shield the non-common-carrier activities of an entity that may otherwise engage in some

common-carrier activities under another statute.

2

Under TDDRA, the term “telephone-billed purchase” includes any purchase that is completed solely

as a consequence of the completion of a telephone call, or the subsequent dialing or comparable action

of the caller. The term specifically excludes all “local exchange” or interexchange telephone service.

Page 17 GAO/T-RCED-00-28
Appendix II 

FTC’s Enforcement Actions Against

Cramming

Table II.1: FTC’s Publicly Filed Cramming Cases, as of October 1999

Company Date of action

Amount of suspect

billing Status

Comments and

additional information

Interactive Audiotext

Services, Inc. Includes

American Billing and

Collection Services, U.S.

Interstate Distributing, Inc.;

and Allstate

Communications

(parent company).

4/22/98, in U.S. District

Court for the Central

District of California;

amended filing on

5/28/98.

$11 million Permanent injunction;

about $11 million in

restitution to consumers.

Settlement entered as

final order; redress

phase under way and

changes required in

business practices.

International Telemedia

Associates, Inc. (ITA); and

Online Consulting Group

(vendor for ITA).

7/10/98, in U.S. District

Court for the Northern

District of Georgia.

$17,100,000 Temporary restraining

order with freezing of

Online’s assets and

preliminary injunction;

receiver appointed to

manage Online.

Bankruptcy court has

appointed a trustee for

ITA; ITA is closed down

and trustee is winding up

its business affairs.

Receiver is closing down

Online after deciding

that it could not be run

as a lawful business.

Hold Billing Services, Ltd.;

HBS Inc.; Avery

Communications (all closely

related companies that are

aggregators); and Veterans

of America Association, Ltd.

(VOAA) (vendor).

7/16/98, in U.S. District

Court for the Western

District of Texas.

$4.7 million Permanent injunction on

9/22/99; $1.6 million in

consumer redress.

Settlement entered as

final order.

Communications Concepts

and Investments, Inc. d/b/a

Crown Communications

and Crown

Communications Two, Inc.;

and Global Collections, Inc.

(Crown’s in-house collection

agency).

12/22/98, in U.S. District

Court for the Southern

District of Florida.

Not yet determined;

formal discovery is under

way.

Not yet determined. Formal discovery and

negotiations are under

way.

Shared Network Services,

LLC, d/b/a Shared Network

Services and 1st Page

6/7/99, in U.S. District

Court for the Eastern

District of California.

Not yet determined. Stipulated preliminary

injunction; discovery is

under way.

Resolution not yet

determined.

Wazzu Corporation 6/7/99, in U.S. District

Court for the Central

District of California.

Not yet determined. Temporary restraining

order; discovery is under

way.

Resolution not yet

determined.

American Telnet, Inc. 6/8/99, in U.S. District

Court for the Southern

District of Florida.

$39.7 million Permanent injunction;

complaint and consent

filed together.

The parties have agreed

to $39.7 million in

forgiven charges and

redress to consumers,

and changes required in

business practices.

(continued)

Page 18 GAO/T-RCED-00-28
Appendix II 

FTC’s Enforcement Actions Against

Cramming

Company Date of action

Amount of suspect

billing Status

Comments and

additional information

Web Valley, Inc.; Profile

National Business Directory,

Inc.; National Business

Directory, Inc.; Protel

Advantage, Inc.; U.S. Protel

7/4/99, in U.S. District

Court for Minnesota.

$9 million Preliminary injunction. Resolution not yet

determined.

U.S. Republic

Communications, Inc.; T.

Gary Remy

10/14/99, in U.S. District

Court for the Southern

District of Texas.

To be determined. Complaint and final

consent filed together.

Up to 124,000

consumers may receive

redress as a result of this

settlement; changes

required in business

practices.

Source: FTC

(385833) Page 19 GAO/T-RCED-00-28
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