FCC Finds That SBC Misrepresented Facts

On October 16, 2001, the Federal Communications Commission ("FCC") issued a Notice of Apparent Liability for Forfeiture and Order, In the Matter of SBC Communications, Inc., Apparent Liability for Forfeiture, File No. EB-01-IH-0339 (the "Notice and Order"), finding substantail evidence that SBC is "apparently liable for forfeiture" in the amount of $2,520,000.00 for the following:

(1) apparently failing to notify the Commission within 30 days that information contained in its section 271 application for Kansas and Oklahoma was no longer substantially accurate or complete in all significant respects;

(2) apparently making a misrepresentation or a willful material omission bearing on a matter within the jurisdiction of the Commission in a written statement submitted by SBC in connection with the investigation into the filing of incorrect affidavits in the Kansas/Oklahoma Section 271 proceeding; and

(3) apparently failing to comply with the terms of the SBC/SNET Consent Decree, 14 FCC Rcd 12741 (1999), which was entered to resolve an earlier investigation of SBC over similar issues.

In reaching these conclusions, the FCC noted almost regretfully that it could not consider a larger fine because this reflects the statutory maximum that it may impose for such violations. The FCC paid particular attention to the fact that in 2000 SBC "had operating revenues of $51.4 billion with operating income of $10.7 billion," and stated that while "it is unclear whether such a forfeiture will act as a sufficient deterrent to SBC against future violations . . . we believe that anything less is unlikely to do so." The FCC further stated that this "is particularly the case in light of the fact that the $1.3 million dollar payment made by SBC as part of the SBC/SNET Consent Decree apparently did not act as a sufficient deterrent with respect to the situation now before us." It should be noted that a bill was introduced earlier this year in Congress, H.R. 1765, that would increase the maximum statutory forfeiture amount. A copy of H.R. 1765 can be obtained at http://www.theorator.com/bills107/hr1765.html

The facts underlying the FCC's Notice and Order stem originally from SBC's October 26, 2000 Section 271 Application to provide in-region, interLATA services in Kansas and Oklahoma. In its Application, SBC had to prove to the Commission that it "provided competitors with nondiscriminatory access to unbundled network elements, pursuant to Section 251(c) and 252(d) of the Act," and that it "provided competing carriers with nondiscriminatory access to its operations support systems ("OSS"), which are used by carriers for pre-ordering, ordering, provisioning, maintenance and repair, and billing services." According to the FCC, SBC also had to demonstrate that it "provided competitors with the same level of access to loop information as that available to itself, so that a competitor could determine during the pre-ordering state whether a requested loop was capable of supporting advanced services equipment."

In its 271 Application, SBC affirmatively maintained that it did provide competing carriers with access to loop qualification information in accordance with the FCC's rules and regulations. However, on November 15, 2000, IP Communications Corp. ("IP") filed comments with the FCC alleging that SBC "filtered" the loop qualification information it disseminated to competing carriers in violation of the FCC's rules. Essentially, IP alleged that (1) "SBC did not provide access to all of the information contained in its own electronic databases, but rather provided information on only the ‘best loop,' as determined by SBC, to the particular end user," and (2) "that SBC's loop qualification system failed to return information on available copper loops to requesting carriers when an end user was served with both copper and fiber." IP contended that when end users had both copper and fiber loops running to their premises, requesting carriers would not receive information on the copper loop because SBC's system would only return fiber as the SBC determined "best loop." As a result, as IP alleged, competing carries wishing to provide services that require cooper loops, such as xDSL, would effectively be "precluded from offering service because such carriers would not know that the copper loops existed."

In response, on December 11, 2000, SBC filed with the FCC a reply brief and supporting affidavits from Angela Cullen (a director in SBC's information technology organization), Mark Welch (a general manager in SBC's network regulatory organization), and Carol Chapman (an associate director in SBC's wholesale marketing group). SBC denied that it unlawfully "filtered" information on its loop qualification system and argued that (1) "it had no obligation to return information on more than one loop to a requested address," and (2) "that the method by which its loop qualification system retrieved and returned information to requesting carriers was without regard to the ‘best loop.'" Relying on the affidavits of its three employees, SBC represented that its loop qualification system would provide information to competing carriers regarding the existence of copper loops for the provisioning of copper loop reliant services like xDSL. The FCC subsequently accepted SBC's arguments, and the evidence presented in the three affidavits, and released an order granting SBC's Application on January 22,2001 (the "Kansas/Oklahoma Order").

According to the FCC, in February 2001, just weeks after the release of the Kansas/Oklahoma Order, Dennis Schuessler (an SBC area manager responsible for the pre-ordering OSS electronic interface) read the Order's loop qualification discussion and "discovered what he believed was an inconsistency between the Commission's description of how SBC's loop qualification system worked and what he had learned about the system in a state loop qualification proceeding in Illinois." Mr. Schuessler expressed his concern to Angela Cullen and Mark Welch but, according to the FCC, neither person made any attempt to verify whether the information contained in their affidavits was correct. According to the FCC, Mr. Welch merely told Mr. Schuessler that the system "had to work" the way it was described in the affidavits.

Approximately one month later, on March 6, 2001, Mr. Schuessler relayed his concern over the affidavits to Carol Chapman. After this conversation, Ms. Chapman contacted John Mileham (the loop qualification project manager for SBC). According to the FCC, Mr. Mileham was "responsible for the day-to-day management of SBC's loop qualification system and was therefore one of the most knowledgeable people at the company on the system." SBC did not, however, choose to submit an affidavit from Mr. Mileham when it tendered the other three affidavits at issue.

Mr. Mileham informed Ms. Chapman that the description of the loop qualification system in the three affidavits was wrong, and Ms. Chapman then contacted SBC's legal department. As the FCC stated, "Mr. Mileham was unquestionably aware that SBC's loop qualification system did not use provisioning logic, and that the system sometimes did not return loop make-up information about available copper loops serving particular end users. As events unfolded, however, Mr. Mileham's knowledge of the SBC loop qualification system was not reflected in the [SBC] reply affidavits. Instead, each of those affiants submitted an affidavit asserting that SBC's system worked in a manner contrary to the facts."

As it turns out, the FCC found that SBC's three affidavits were apparently based on purported facts contained in an e-mail from an SBC attorney. More specifically, according to the FCC, Ms. Cullen received an e-mail from an SBC attorney stating that "SBC's loop qualification system returned information on the loop that the system would actually provision, if the requesting carrier had requested xDSL or line sharing service." Ms. Cullen was asked to "verify" that "the loop qualification system worked as described in the attorney's e-mail." According to the FCC, Ms. Cullen eventually told the FCC Enforcement Bureau that she copied the attorney's description (with minor non-substantive changes) into an e-mail she sent to the two other SBC employees whom she believed to be subject matter experts on the SBC loop qualification system. In her forwarded e-mail message, Ms. Cullen stated that "[w]e need to present rebuttal testimony that says from a technical perspective LoopQual provides . . ." and then Ms. Cullen inserted the SBC attorney's description. It is interesting to note that, according to the FCC, Mr. Schuessler was copied on Ms. Cullen's e-mail while the affidavits were in the drafting stages and responded by stating that the description of the loop qualification system was "basically accurate." Mr. Schuessler further noted that he would "leave the technical details to John Mileham to answer," and he copied Mr. Mileham on the e-mail.

According to the FCC, Mr. Mileham contended that he was on vacation when the e-mails containing the proposed affidavit language were forwarded to him. Mr. Mileham further contended that when he returned home on December 3, 2000, he downloaded approximately three hundred e-mails on his home computer. The next day, according to the FCC, Mr. Mileham "discovered that the e-mails he had downloaded the day before were missing" from his office computer. When Mr. Mileham returned home to retrieve the "missing" e-mails from his home computer it "crashed for some reason and he was forced to reload his operating system onto his home computer, apparently deleting the ‘missing' e-mails forever." Coincidentally, as the FCC pointed out, Mr. Mileham's previous job involved "desktop computer support," but in this instance Mr. Mileham did not make any effort to recover the three hundred lost e-mails. Likewise, according to the FCC, Mr. Mileham did not "solicit anyone's help in recovering the lost e-mails" nor did he "tell any other SBC employees, including his supervisors, about his computer crash." The evidence also demonstrated that Mr. Mileham was the only SBC employee who had experienced the problem.

Nonetheless, on December 6, 2000, Mr. Mileham did receive an e-mail draft of Mr. Welch's affidavit that contained the incorrect loop qualification description. According to the FCC, Mr. Mileham responded to the e-mail with "only minor edits and failed to correct the one sentence in Mr. Welch's affidavit that described matters within Mr. Mileham's job responsibilities." Mr. Mileham subsequently admitted to the FCC that the Welch affidavit was incorrect but stated that he reviewed the affidavit "late at night" and "must have skipped this important sentence." The FCC disregarded this explanation, finding that "the evidence demonstrates that Mr. Mileham actually reviewed Mr. Welch's affidavit around noon."

According to the FCC, it was not until approximately late March 2001 when, in connection with SBC's Section 271 Application for Missouri, that SBC first advised the Commission that the affidavits filed in the Kansas/Oklahoma proceeding "may have contained inaccurate statements concerning the operation of its loop qualification system." It was not until April 13, 2001, when SBC finally filed the required notice under Section 1.65 of the FCC's rules admitting that the three reply affidavits it filed in the Kansas/Oklahoma proceeding actually "contained inaccurate information on a loop qualification issue."

As a result, in the Notice and Order, the FCC found that SBC "did not exercise reasonable care in verifying the information regarding the operation of its loop qualification system before submitting the three affidavits at issue." The FCC further found that "although our rules require companies promptly to correct inaccurate or incomplete information submitted to the Commission, SBC took over two months after the company first focused on the fact that the affidavits were (or may have been) incorrect to notify the Commission that the reply affidavits were wrong." Finally, the FCC found that "when the Commission began to investigate those inaccuracies, an SBC employee apparently intentionally misrepresented facts to the Commission in an affidavit attached to a report signed by an SBC Senior Vice President," and "SBC apparently violated the terms of the June 1999 SBC/SNET Consent Decree, in which SBC promised to train its employees who have regular interaction with the Commission . . . in our rules governing contacts with, and representations to, the Commission."

The FCC made clear that "[t]he duty of absolute truth and candor is a fundamental requirement for those appearing before the Commission . . . because we do not have the resources to verify independently each and every representation made in the thousands of pages submitted to us each day. For that reason we are disturbed by SBC's apparent actions here." The FCC did not, however, find that SBC intentionally submitted false affidavits in a plan to mislead the Commission about the true workings of its loop qualification system. Rather, the FCC stated that while SBC's "lack of care could hardly be more evident," and while "it is certainly permissible, as a general matter, to infer an intention to mislead from the circumstances surrounding the making of a false statement . . . we believe the evidence here is more indicative of sloppiness on SBC's part . . .." Nonetheless, the FCC did find that Mr. Mileham "apparently misrepresented the facts or made a willful omission" when describing his "lost e-mail problem," and it found that "SBC's conduct here appears particularly egregious because just two years ago, in June 1999, the company and the Commission entered into the SBC/SNET Consent Decree, which resolved a similar investigation."

Thus, as noted above, the FCC found SBC "apparently liable" for forfeiture in the amount of $2,520,000.00 for willfully or repeatedly violating Sections 1.17 and 1.65 of the Commission's rules and the terms of the SBC/SNET Consent Decree. The Notice and Order gives SBC thirty days from its release to pay the full amount of the forfeiture, or file a written statement showing why the proposed forfeiture should not be imposed or should be reduced, and requires that SBC demonstrate that it has taken steps to ensure future compliance with the rules and regulations at issue and the SBC/SNET Consent Decree.

In conclusion, while the forfeiture imposed upon SBC by the Commission in this case is the statutory maximum, as FCC Chairman Powell lamented earlier in the year, "this amount is insufficient to punish and to deter violations in many instances." That certainly appears to be the case in this instance. Taking into consideration SBC's prior conduct, and the fact that the current forfeiture will amount to less than 0.005 % of SBC's 2000 operating revenues, it is optimistic at best to presume that this forfeiture will have any greater deterrent effect on SBC than the other fines that have been assessed against it in the past. Likewise, while the introduction of H.R. 1765 is a good start, until Congress adequately increases the FCC's ability to enforce its competitive safeguard regulations and gives the FCC authority to impose more commensurate penalties when carriers like SBC fail to follow the rules, it is unlikely that the FCC will be able to deter similar violations against CLECs in the future.

This article is intended to provide only a brief overview of the FCC's Notice of Apparent Liability for Forfeiture and Order. If you have any questions regarding the subject matter of this article or if you would like to obtain an electronic copy of the FCC's Notice of Apparent Liability Order and/or H.R. 1765, you may contact the author, Elliott S. Cappuccio, through the link provided below.

Elliott S. Cappuccio is an associate in the San Antonio office of Stumpf Craddock Massey & Pulman, P.C. (SCM&P). Mr. Cappuccio practices primarily in the fields of telecommunications law, commercial litigation, and consumer law.

SCM&P is a full-service law firm with practice areas that include, among others: Telecommunications; Internet; Corporate & Venture Structuring; IP Protection; Banking & Bankruptcy; Real Estate; and Commercial & Civil Litigation. In these areas, SCM&P represents CLECs, IXCs, ISPs, ESPs, ASPs, and many other providers and users of telecommunications services, equipment, and bandwidth.

SCM&P offers its clients a unique advantage over other law firms: we do not, have not, and will not represent the incumbent telecom monopolies. We are Counsel To The Competition.™