Wireless Providers’ Disclosure of Line-Item Charges Can Be Regulated by Washington State Law and Is Not Pre-Empted by the Federal Communications Act

Update

08.25.2008

On August 7, 2008, the U.S. Court of Appeals for the Ninth Circuit held that the Federal Communications Act ("FCA" or the "Act") does not pre-empt state claims brought pursuant to a Washington state consumer protection statute, RCW 82.04.500, which has been interpreted to prohibit Washington businesses from passing line-item charges on to a customer without proper disclosure prior to the customer agreeing to the final purchase price. Peck v. Cingular Wireless, Docket No. 06-36027 (9th Cir. Aug. 7, 2008).[1] This ruling is likely to affect not only wireless providers serving customers in Washington but also providers serving customers in any state with a similar consumer protection statute.

Regulatory Background

Section 332(c)(3)(A) of the FCA grants the Federal Communications Commission ("FCC") exclusive authority over the rates of wireless carriers, providing that "no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service." 47 U.S.C. § 332(c)(3)(A). The Act further provides, however, that "this paragraph shall not prohibit a State from regulating the other terms and conditions of commercial mobile services." Id. Thus, while a state may not regulate a wireless carrier's "rates," it may regulate "other terms and conditions" of wireless service.

In 2005, the FCC ruled that its exclusive authority over "rates" pre-empts state and local regulations requiring or prohibiting the use of line-item charges by wireless carriers. See In the Matter of Truth-in-Billing and Billing Format, 20 FCC Rcd. 6448 (2005) ("Second Report and Order"). Such regulations are pre-empted, the FCC reasoned, because state and local regulation of line-item charges directly affects a carrier's "rate structure" by forcing the carrier to adhere to a varying patchwork of state line-item requirements and to adjust its rate structure from jurisdiction to jurisdiction.

Consumer advocates then challenged the Second Report and Order in both the Second and Eleventh Circuits. These challenges were consolidated in the Eleventh Circuit, which held that the FCC's statutory interpretation was contrary to the clear intent of Congress: "The language of Section 332(c)(3)(A) unambiguously preserved the ability of the States to regulate the use of line items in cellular wireless bills. . . . The prohibition or requirement of a line item affects the presentation of the charge on the user's bill, but it does not affect the amount that a user is charged for service." Nat'l Ass'n of State Util. Consumer Advocates v. FCC, 457 F.3d 1238, 1254 (11th Cir. 2006), cert denied, 128 S. Ct. 1119 (2008) ("NASUCA").

Case History

Peck, a former Cingular Wireless employee, filed a class action in Washington state court alleging that Cingular violated state law by passing through to customers a 31-cent line-item charge labeled "State B&O Surcharge" and by failing to disclose this charge to its customers prior to their decision to purchase Cingular's service. In addition to seeking a declaratory order that this practice violated RCW 82.04.500, Peck asserted claims for breach of contract, unjust enrichment and violation of Washington's Consumer Protection Act. RCW 82.04.500 provides:

It is not the intention of this chapter that the taxes herein levied upon persons engaging in business be construed as taxes upon the purchasers or customers, but that such taxes be levied upon, and collectible from, the person engaging in the business activities herein designated and that such taxes shall constitute a part of the operating overhead of such persons.

Cingular removed the case to federal district court and sought dismissal based on federal pre-emption under Section 332(c)(3)(A) of the FCA. The district court granted the motion. On appeal, the Court of Appeals for the Ninth Circuit reversed.

The Ninth Circuit first held that the district court was bound by the Eleventh Circuit's holding in NASUCA. The court then analyzed Section 332(c)(3)(A). It held that Section 332(c)(3)(A) does not pre-empt state or local regulation of line-item charges because "the prohibition or requirement of a line item affects the presentation of the charge on the user's bill, but it does not affect the amount that a user is charged for service." The court reasoned that RCW 82.04.500 acts as a consumer protection statute by regulating the method of disclosure, as opposed to the reasonableness or propriety of the underlying rate. The court further held that Congress intended to leave states the authority to regulate line items under the "other terms and conditions" exception to Section 332(c)(3)(A). See H.R. Rep. No. 103-111, at 261 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 588 ('''terms and conditions' . . . include such matters as customer billing information and practices and billing disputes and other consumer protection matters") (emphasis added by Peck court).

Conclusion

Following Peck, wireless providers serving customers in Washington cannot claim a safe haven under the FCA when it comes to adding the B&O charge to a customer's bill after the customer has agreed to the purchase price. Line-item charges are not "rates" regulated under the FCA, but instead are governed by Washington's consumer protection provisions requiring disclosure of all charges. While Washington wireless providers "remain free to charge its customers as much, or as little, as the market will bear," (Peck, No. 06-36027) all line-item charges should be disclosed in the customer's contract so as to keep from running afoul of RCW 82.04.500 and Washington's consumer protection provisions.

Wireless providers serving customers outside of Washington State also may find themselves exposed to similar consumer protection legislation. The bottom line is that wireless providers can no longer rely on federal pre-emption as a defense to claims alleging that line-item charges violate state consumer protection laws.

[1] Subsequent to the filing of the Peck litigation, the Washington Supreme Court held that RCW 82.04.500 does not prohibit businesses from passing the business and occupation tax ("B&O Tax") through to consumers; however, the tax may only be passed on to consumers if it is disclosed and negotiated as an element of the final price. Nelson v. Appleway Chevrolet, Inc., 157 P.3d 847 (Wash. 2007).