FTC Settles Case Against Prepaid Phone Cards

188278_3489A case the Federal Trade Commission (“FTC”) has been investigating for more than two (2) years was settled last month.  For several years, the FTC received numerous complaints that prepaid phone cards sold by DR Phone Communications, Inc., also doing business as drphonecom.com (“DR Phone”), contained far fewer long distance phone minutes than were advertised.  Upon investigating the calling cards, which are primarily consumed and marketed to recent immigrants to the U.S., the FTC found that the cards delivered only forty percent (40%) of the minutes promised, with some delivering less than five percent (5%) of the minutes advertised.

Authority to Regulate Unfair and Deceptive Business Practices

While the Federal Communications Commission (“FCC”) has jurisdiction over the telecommunications industry generally, the FTC is tasked with regulating the marketing aspects associated with telecommunications-related products and services.  As detailed in a previous post, the FTC is an independent agency established in 1914 to, among other things, protect consumers from unfair and deceptive business practices, especially focusing on advertising, marketing, telemarketing fraud and privacy/identity protection.  Under the FTC Act, a business and/or individual will be found to have engaged in an unfair business practice if the practice is found to be unethical and injures consumers, in violation of established public policy.  Likewise, a business and/or individual will be found to have engaged in deceptive business practices if it made a material representation/omission or engaged in an activity that is likely to deceive reasonable consumers.  The FTC has stated that a “material” representation, omission or practice is one that affects the consumer’s behavior.

Application of the FTC Act to DR Phone

In a complaint filed on May 22, 2012, the FTC alleged that DR Phone violated the FTC Act by misrepresenting the number of calling minutes available on the defendant’s prepaid calling cards and for failing to adequately disclose the fees that reduce the number of calling minutes contained on the pre-paid calling cards.  Specifically, the FTC alleged that DR Phone failed to properly inform consumers that the advertised calling minutes were available only if used on a single call, that there were limits on the time of day in which the advertised rates were available and that the calling cards were subject to expiration and blackout dates.

DR Phone’s Settlement Terms and Penalties

On April 24, 2013, a consent order was entered in the U.S. District Court for the Northern District of California, in which DR Phone agreed to implement strict procedures to ensure that all of its marketing material is accurate and up-to-date.  Additionally, DR Phone agreed to clearly and conspicuously disclose all material terms and fees associated with its prepaid phone cards.  Finally, DR Phone agreed to pay a monetary judgment of $61,597.00 as disgorgement of all proceeds derived from the alleged FTC Act violations.

This topic should be of interest to anyone engaging in a commercial venture within the United States, especially those involved in the marketing and advertising of prepaid calling cards and/or telemarketing services generally.

If you would like to ensure that you are compliant with current FTC regulations, or if you are facing class action litigation or regulatory action, please e-mail us at info@kleinmoynihan.com, or call us at (212) 246-0900.

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney.  Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.

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David Klein

David Klein is one of the most recognized attorneys in the technology, Internet marketing, sweepstakes, and telecommunications fields. Skilled at counseling clients on a broad range of technology-related matters, David Klein has substantial experience in negotiating and drafting complex licensing, marketing and Internet agreements.

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