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Beware of the Tipping Point.  Telecommunications services procurements do not always yield the targeted results.  This typically arises when a non-incumbent carrier concludes the incumbent is going to retain the business.  This can and does occur when the customer signals—intentionally or not—that  the RFP process is just a formality.

It can also arise in connection with a well-executed RFP process.  This can occur after a successful procurement in which substantial business was awarded to an aggressive non-incumbent.  If, in the subsequent procurement cycle, the longstanding provider believes growth or future business is unlikely, the customer may be surprised by the longstanding carrier’s indifferent response to the RFP.  At this juncture, the customer’s business has reached the carrier’s “tipping point.”

These outcomes are going to occur from time to time.  From an economic perspective, the customer can respond by migrating more business from the longstanding provider; sometimes the longstanding carrier controls access at customer locations, preserving a lucrative, albeit smaller, revenue stream.  The ability to migrate traffic also may be trumped by the customer’s interest in the maintaining diversity in carriers.  Diversity has a price.  Anticipating this possible outcome helps set reasonable expectations for upper management.

Seize the Opportunity.  Recent experiences have confirmed the virtue of a practice we have followed over the years: When entering into an agreement with a services provider for the first time, or after a noticeable hiatus, push for as many changes as possible to the carrier’s one-sided standard agreement.  There never will be a better time.

Two reasons underlie this recommendation.  First, the “new” services provider wants the business.  This tempers carrier intransigence to substantive changes to their standard agreements.  Second, carriers are far more inclined to amend existing agreements with new pricing schedules and other changes to the original agreement.  Carrier account teams would rather not re-visit all aspects of a negotiated agreement if at all possible.

Timeliness Makes a Difference:  New or amended services agreements typically implement new services or improved pricing or both.  Realizing these benefits quickly is a central objective for the enterprise.  While “keeping the process moving” is essential throughout the procurement process, as the terms of the deal are set out in the new agreement or amendment,  the customer’s team (enterprise staff, consultants and counsel) should complete their review and provide their inputs as timely as possible.  Providing comprehensive revisions as opposed to piece-meal edits is the only approach.  A timely, comprehensive response motivates effective carrier account representatives to bring together their offer managers, subject matter experts, and counsel to conclude the process quickly.

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The privacy implications of the sale of the bankrupt Borders Group’s consumer database to Barnes & Noble have been a focus of the Federal Trade Commission (“FTC”), state Attorneys General, and lawmakers, and the transaction highlights the need for companies to carefully draft and periodically review their privacy notices to consumers.

Privacy notices should not only accurately reflect current practices regarding the collection, use, sharing, and security of personal information, but also cover possible future transactions, such as a dissolution, merger, or sale of assets or the sharing of personal information with service providers.

In an e-mail sent to Borders customers and a notice on the Barnes & Noble website, customers were advised that they can opt-out of having their contact information (which includes names, addresses, and e-mail addresses) and purchasing history shared with Barnes & Noble.  This came about because Borders reportedly had at least three different privacy policies since 2006 that limited how personal information collected from customers could be shared; earlier policies stated that Borders would not share information without express consent, and a later policy indicated that information could be transferred if Borders was sold, merged, or reorganized, but the company would seek appropriate protections in such cases.  The FTC questioned whether the later policy covered dissolution and the sale of assets in bankruptcy, and the later policy only applied to information collected after the date it was adopted, so customers’ consent to the transfer was required.

Recent privacy enforcement actions by the FTC and lawsuits have focused on companies’ deceptive or unfair practices in failing to adhere to their stated privacy policies, applying a material change in a privacy policy to personal information collected under a prior policy without an affected individual’s consent, and failing to adequately secure personal information.  In light of this, it is important to ensure that privacy policies accurately describe the company’s current practices and are comprehensive enough to cover possible future transactions involving personal information.  In addition, personal information collected from consumers should always be appropriately secured from unauthorized acquisition or use.

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In an earlier entry, we outlined the importance of counsel understanding the critical elements of the business deal in order “to provide relevant advice” to enterprise customers negotiating telecommunications services agreements. This entry focuses on carriers’ standard services agreements (“Carrier Agreements”), highlighting how these agreements remain highly problematic.

 1.  Above All, Carrier Agreements Are Drafted to Maintain Projected Revenue Streams

Minimum revenue commitments and early termination liability provisions are standard in Carrier Agreements, vestiges of the 20th Century when interexchange (Wireline) services were offered under tariff.  Regulators either required or tolerated revenue shortfall protection for discounted rates.  Today, the economic justification for early termination liability is tenuous, at best, as (1) the services are no longer regulated and the carriers vigorously maintain the markets for their services are competitive;  (2) carriers’ costs consist largely of fixed, sunk network investments; and (3), from the customers’ perspective, the logistics and transaction costs in migrating enterprise- wide data services to successor carriers negates the option of readily switching carriers to optimize rates.

Billing for telecommunications services have been the carriers’ Achilles Heel for decades. A cottage industry of telecom expense management firms thrive because of challenged carrier billing systems.  Despite this reality, standard billing dispute clauses call for payment of disputed amounts after the carrier reaches its conclusion regarding the dispute.

Unrealistically low caps on direct damages is another 20th Century vestige.  While problematic, the more significant concern is that Carrier Agreements do not provide meaningful resolution procedures for chronic service issues, as discussed in an earlier entry.  Site-specific or network-based Service Level Agreements are not adequate as the impact of chronic service issues on the enterprise go far beyond generally accepted notions of direct damages.

Continue Reading The Persistent One-Sidedness of Carrier Agreements

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The American Arbitration Association (“AAA”), at the request of the Cellular Telecommunications Industry Association (CTIA) established a special arbitration program for the wireless industry and its customers.  The program has its own set of Rules and its own Panel of arbitrators.  This program is designed to address any dispute relating to the provision of cellular and broadband PCS services although any arbitration agreement can elect to employ the rules.  Any AAA arbitration arising within the wireless industry is handled under this program by default, unless other rules are stipulated by contract.

The Wireless Industry Arbitration rules are essentially the same as those for ordinary commercial disputes.  There are three tracks.  The Regular Track is for cases involving claims between $75,000 and $500,000 dollars.  Smaller claims are handled on using the Expedited Procedure and larger claims are handled on the Large/Complex Case Track.

In the Expedited Procedure, the AAA appoints a single arbitrator.  There is a presumption that the matter will be “tried” on the papers and there is a 45-day “time standard” for case completion.  In the Regular Track, there is presumptively one arbitrator and any discovery is at the discretion of the arbitrator.  Cases on the Large/Complex Track, are subject to mandatory pre-arbitration mediation and/or early neutral evaluation according to AAA.  Also, there is a presumption that there will be three arbitrators and the presumption that there will be discovery.  Finally, the parties can agree to an appellate type review of the initial award.  The Large/Complex case rules can be applied to claims that are smaller than $500,000 or that have no undetermined or nonmonetary claims at the request of any party.

As part of the program, AAA maintains a special panel of arbitrators known as the Telecommunications Panel.  The Telecommunications Panel includes many individuals who are engaged directly in the telecommunications industry.  According to AAA, attorney members of the Panel typically devote at least half of their practice to telecommunications matters.

Of course, any of the Rules can be altered by contract between the parties.

Continue Reading Should You Arbitrate Under the Wireless Industry Arbitration Rules?

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When carriers routinely reject risk-balancing contract provisions based on “the business case,” deliver standard agreements that effectively eliminate the possibility of damages no matter how bad their services in a given instance, or demand iron-clad “preferred provider” clauses, the only conclusion is that the carriers do not perceive significant competition. While aggressive carrier positions are based, in part, on the desire to maintain revenues and experience in negotiating thousands of services agreements, their standard agreements and stock responses would be far more balanced were the markets for Wireline and Wireless services truly competitive.

From this perspective, the Justice Department’s complaint seeking to block the AT&T-T-Mobile merger was a welcome rush of fresh air.  It characterized a market subject to significant competitive challenges were the proposed merger consummated. While the Sprint complaint brought under the Clayton Act may be viewed as the legal equivalent of “piling on,” it provides a useful perspective on the domestic market for Wireless services.

It highlights the spectrum resources held by AT&T and Verizon (while deftly understating Sprint’s substantial spectrum resources), the competitive advantages realized by Verizon Wireless and AT&T by virtue of their exclusive/priority handset arrangements, and the dominance of AT&T and Verizon in regard to backhaul networks and special access services.  From the author’s perspective, the anti-competitive consequences of handset exclusivity remain largely ignored by regulators. The Sprint complaint highlights the various Wireless market segments, noting that the combination of AT&T and T-Mobile would result in AT&T and Verizon controlling 83%-85% of the postpaid market which is the Wireless segment of interest for business and government customers.

As the District Court for the District Columbia moves forward with the complaints that have been brought by DoJ, Sprint and, most recently, Cellular South, a decision by the FCC may be forthcoming in less than 60 days. On August 26, 2011, the FCC “restarted” its informal 180-day “shot clock” for ruling on the merger.  Based on comments by FCC Chairman Genachowski and Commissioner Michael Copps issued shortly after DoJ filed its complaint,  AT&T may be hard-pressed to prevail at the agency even though its core argument that the merger will advance broadband deployment probably carries more weight before the FCC as compared to District Court Judge Ellen S. Huvelle presiding over the antitrust actions.

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Most enterprises initiating Wireline and Wireless services procurements retain the services of consultants (“Telecom Consultants”).  Current pricing information for enterprise Wireless and Wireline services is not publicly available.  Competent consultants know trends in service offerings and market pricing.

Who are Telecom Consultants?  Generally speaking, Telecom Consultants are individuals, firms or groups within consulting firms that focus almost exclusively on Wireless or Wireline services procurements.  Many consultants previously worked in carrier sales or offer management positions and understand the internal incentives and strategies of the carriers.  Large, widely-known corporate consulting organizations, telecom technology trend advisers and telecom bill auditing firms are not necessarily experienced or as helpful as qualified consultants.

Services Provided By Telecom Consultants.  The services offered by Telecom Consultants vary.  While not every consultant offers each service, the principal services offered by Telecom Consultants may be summarized as follows:

1. Finalize the customer’s demand set for inclusion in customer’s RFPs.

– Many RFPs are based on consultants’ templates.

2. Share responsibility with the customer in managing the procurement process.

3. Negotiate the economic elements of the agreements, principally rates, custom plans and commitments.

4. Advise or participate directly in Wireline pricing refresh reviews.

5. Provide billing review, payment, reporting and audit services (telecom expense management services).

Some consultants focus exclusively on Wireless services, others concentrate on domestic and U.S.-centric international services, and some address Wireless and Wireline services for much of the developed world.

Criteria for Selecting Telecom Consultants.  Prior working relationships and referrals typically underlie the decision to engage a particular consultant.  We recommend that enterprise customers elicit the following information when looking to engage a Telecom Consultant:  (a) references from current or recent clients; (b) the services provided by the consultant; and (c) the number of recent procurements (prior 2 years to present) that equal or exceed the customer’s projected annual expenditures and approximate the customer’s mix of services, in terms of (i) wireless, wireline services or both, and (ii) geographic scope—primarily domestic, domestic and international, or domestic, international, and rest-of-world.  Relevant experience is essential.

Another consideration is the consultant’s fee structure.  The principal fee options include hourly rates, fixed fees or “percentage of savings realized” under the new agreement.  We have detected some “buyer’s remorse” by customers that entered into “percentage of savings realized” arrangements.

The “Value-Added” of Telecom Consultants.  Customer demand sets, trends in service options, bundles, and pricing change significantly over 3-5 years, the duration of many Wireline services agreements.  Wireless service pricing is very dynamic at this time, as well.  While many corporate IT and telecom departments monitor trends in technology and services, experienced consultants know the carriers’ current service migration strategies, pricing trends and service plans.  Consultants identify carrier ploys of emphasizing projected savings attributable to migrating from older to newer service offerings and redirect the customer’s focus to the market rates for the newer service offerings.  In sum, our experience is that customers secure better deals when engaging the services of competent Telecom Consultants.

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Companies should not assume that their general liability policies cover cyber attacks, and they should anticipate disputes from insurers when seeking defense and/or indemnity under these policies.  This is illustrated by a Complaint filed by Zurich Insurance Company in the Supreme Court of New York against various Sony entities relating to claims for coverage after the cyber attacks that Sony experienced earlier this year.  Zurich seeks a declaration that it is not obligated to defend or indemnify Sony for claims made against it because the damages are not covered by Sony’s commercial general liability policy.  The Complaint highlights the need for companies to examine their insurance policies to determine the extent of coverage and whether additional cyber insurance is necessary.

Sony estimates its costs from the attacks- which exposed personal information for more than 100 million individuals and resulted in more than 50 class action lawsuits, potential actions by state attorneys general, and other claims- to be $170 million by the end of fiscal year 2011.  The class action suits against Sony allege damages due to unauthorized access to personal information and Sony’s delay in notifying consumers.  Sony’s commercial general liability policy covers bodily injury, property damage, and certain personal and advertising injury offenses.

The increase in cyber attacks, data breaches, and lawsuits (in particular class action suits) from aggrieved parties makes cyber insurance an attractive option, but there are many factors to consider.  In addition, the uncertainty associated with general liability insurance and cyber attacks underscores that insurance cannot and should not be relied upon in lieu of internal privacy and data security programs, training, and risk assessments to mitigate the impact of cyber incidents.

An article on this issue prepared by Keller and Heckman LLP attorneys is available on our website.

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Moving far more quickly than the Federal Communications Commission, rejecting AT&T’s promises of more rapid wireless broadband development and the carrier’s unprecedented public relations campaign, the Department of Justice today filed a civil antitrust lawsuit to block AT&T’s proposed acquisition of T-Mobile USA Inc. Two points in DoJ’s press release of particular note include the following:

The department said that the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.

The department said that it gave serious consideration to the efficiencies that the merging parties claim would result from the transaction.   The department concluded AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction’s substantial adverse impact on competition and consumers.   Moreover, the department said that AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor.

DoJ’s decision is a stunning and potentially costly defeat for AT&T ( it agreed to a $3.0 Billion break-up fee, plus spectrum assignments), and a major legal victory for Sprint.  On the other hand, that DoJ is opposing the combination of the 2nd and 4th largest Wireless carriers in a growing, but highly concentrated, industry subject to increasing economies of scale and scope is not surprising. DoJ’s action increases substantially the likelihood of the FCC reaching the same conclusion, assuming AT&T and T-Mobile do not first withdraw their request for the FCC’s consent to the transaction.

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Growth in enterprise Wireless services tracks society’s accelerating shift toward all things Wireless—smart phones, apps, tablets, and Wireless broadband. The following is our assessment of major trends and influences currently impacting enterprise Wireless deals.      

  • If given the choice, telecom consultants would prefer—by a wide margin—to work on a Wireless procurement as compared to a Wireline procurement:  They believe the opportunity to deliver substantial savings is far greater on Wireless deals.
  • Telecom expense management companies are in strong demand; capturing and tracking Wireless expenditures is a growing cost management issue for many enterprises.
  • As in Wireline deals, pricing can vary considerably among comparable customers.
  • Taxes.  As with rental car charges, expenditures for Wireless services are subject to a daunting array of taxes and surcharges that can approximate 25% of monthly Wireless service charges. These fall within four categories:

-State and local sales and excise state taxes, including E-911 surcharges/taxes, imposed directly on amounts paid for Wireless services,

-Property, gross receipts and other taxes imposed on carrier’s Wireless assets, operations and revenues (indirect taxes),

-Recovery of the Wireless carrier’s assessment for Federal and in some cases, state universal service fund contributions (USF surcharge recovery), and

-All-encompassing “regulatory cost recovery” surcharges.

  • The number of enterprises whose Wireless strategy is limited to employee Wireless cost reimbursement is declining rapidly, if not in free fall.
  • Multi-nationals must address globe-trotting staff and management, as well as foreign operations, in determining whether national, regional or global Wireless procurement strategies are appropriate.
  • The Wireless procurement cycle is heavily influenced by the handset cost recovery cycle.
  • Carrier’s standard Wireless agreements are far less convoluted than Wireline agreements; some are even readable, though terribly one-sided.
  • High level thoughts on Wireless agreements:

-The right to audit bills is essential

-Fixed pricing (custom plans) is always preferable to adjustable pricing

-Exclusive provider arrangements should be avoided

-A strategy for replacing handsets whose continued use is threatened or prohibited due to IP infringement litigation merits serious consideration

-The relationship between the customer-specific agreement and the carrier’s online documents (which it can change without notice) should be clearly defined (requiring something more than standard precedence clauses)

-Meaningful SLAs (service availability, quality and reliability) for Wireless services remain elusive

  • While approval of the AT&T-T-Mobile merger (even with every condition imaginable) is far from certain, consider finalizing new Wireless deals or major amendments in 2011.  Wireless procurements could become even more challenging if AT&T prevails in its quest for T-Mobile.
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The combination of Google and Motorola has elicited a flood of comments and analyses.  Those relating to Motorola’s patent portfolio are of most immediate importance for enterprise Wireless customers. As noted by Verizon’s deputy general counsel John Thorne, “the extent that this deal might bring some stability to the ongoing smart phone patent disputes, that would be a welcome development.” This point was amplified by Marguerite Reardon, highlighting how the Motorola patents could bolster Google’s position against patent infringement actions by competitors. Android is now the top-selling smart phone operating system worldwide, reportedly commanding around 43% of the market as of the second quarter of 2011.

The debacle of IP infringement litigation is playing out in Europe. In an action brought in the Netherlands, Computerworld reports that Apple “is demanding an extensive ban on all [Samsung]Galaxy series smart phones and tablets, including a complete recall of stock by European distributors and resellers.” Enterprise customers have little interest in revisiting the wireless IP infringement precipice of several years ago when RIM and NTP settled their patent infringement litigation at the 11th hour, assuring continued use of Blackberry handsets.

One question raised by the Motorola-Google combination is whether there are options for Wireless customers to simply “rolling the dice” and hoping the Blackberry debacle is not reprised.  One approach is to secure an indemnity, running from the handset  manufacturer/operating system licensor or Wireless carrier or both to the customer to address 3rd party IP infringement claims.   Securing the indemnity from the handset manufacturer may be doable for the largest customers.

The carriers’ preferred position is that the customer look to the equipment supplier for handset issues, such as warranty, indemnity, and continued use.  That argument would ring true, but for the fact that the Wireless carriers determine which equipment customers can use on their networks.  The carriers also have more insights into “ongoing smart phone patent disputes” than customers. While customers may have the option to procure and use equipment (subject to the carrier’s approval) that is not supplied by the carriers, most, if not all, of the latest and most desired handsets, particularly smart phones, and tablets are bundled with the carriers’ services. (WiFi-only tablets being the principal exception).

A practical solution is appropriate.  If an IP infringement action threatens the continued use of a carrier-supplied handset, the carrier should be obligated to replace the unit with a comparable device at no incremental cost to the Customer.