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Dec 15, 2006

The Legal Line

Ed Maldonado

Dear Ed:I’m a regular reader of The Prepaid Press’ Legal Line and have enjoyed your responses to questions since 2003. I have always wondered about one thing in your column: where do these intelligent people that send Legal Line questions come from in the real business of prepaid? The people I see everyday in the business are much edgier. They swear and make threats in their e-mails to me. They listen to the legal advice of their attorneys, and then ignore it. They sue over egos and control of retail sales they don’t have. They cross the ethical line to get an advantage whenever they think they might get screwed. I don’t like it but it’s been the prepaid business I’ve known since 1998. I can’t say much about carriers, online PINs, stored value, wireless and all the other stuff in prepaid that you respond to in your column. They may be the ones with the intelligent questions. But where I come from (the distribution side) the questions should be more like: “This guy screwed me out of $$$ and how do I get back at him twice as hard?” Or, “How do I get this deadbeat to pay what he owes?” or “I think my business partner stealing business from me, how do I get him first?” This is the legal side of the street level sales of prepaid (you know, God Bless America and free competition).Don’t get me wrong. I am as fair and ethical as possible with the next guy and am not out to screw anyone but I would just like to see one of these types of questions in Legal Line at least once. Have you gotten questions like that before or do just the prepaid intelligencia write you?Retail SAMYDear SAMY:Thank you for your e-mail. In Legal Line, I cover an array of topics from business to regulatory to litigation. I think your question really relates to the litigation questions I get. Honestly, there have not been many as of late. It seems that the focus of concern in the industry has been on the enforcement of regulatory obligations that have been off the radar for most of this decade. This is starting to affect overall margins on profitability for some providers that were ill-prepared. I definitely see more stored value and online PIN businesses asking questions. Perhaps this is due to a general shift is the marketplace. It is no secret that “hard card” sales, and margins, have tapered off in recent years. This makes competition tighter and often affects how people deal with one another in the market place when it comes to legal matters. This is also a time when you see more disputes over both major and minor issues, which might explain the “edginess” you see with those working that market. It is also important to remember that many players in the traditional “hard card” distribution market have migrated to POS or other electronic payment and delivery systems. This has introduced further strain, making some players a little more desperate when it comes to maintaining, or losing “turf” in the war for retail outlets. A very esteemed mentor of mine once told me that the greatest role an attorney must perform is that of “counselor” or advisor – the preventative medicine of the legal profession. This role sometime involves educating a client on legal issues and not addressing the personal or emotional aspects of the client’s dilemma in order to show them what the end-game result may be from a legal perspective. I try to apply this in Legal Line. Many questions submitted to me are not used because they are “personalized” by the sender and identify both the sender and the company or person with whom they have a problem. Some questions are even loaded to try and defend a point or principle that the writer wishes to proffer to the readers of Legal Line on some legal or regulatory matter. I try to handle this as diplomatically as possible, and if I do respond, I edit out names or leave a blank line in the question to protect the innocent and/or guilty. Insofar as your question relates to legal rights and remedies of prepaid distributors, I have addressed those questions in the past in Legal Line. I have also referred readers to speak with their local legal counsel on such matters because like politics, enforcement of legal rights and procedural remedies, are local to some extent. A local lawyer can make the good faith determination as to the litigation merits of a particular problem or controversy based upon full disclosure of the facts. That is not for Legal Line to determine.I got the impression from your e-mail that you feel unethical conduct has gotten out-of-hand in the arena of “hard card” distribution. This may be a good topic to address near the end of this year as your question alludes to possible problems in that niche of prepaid from a legal perspective in 2007. To date, there is no model code of ethics for those in the prepaid calling card industry. In large part, this is attributable not having a strong industry association with support from industry players to set standards. While attempts to set standards have been made in the past, apathy from the industry left them without any real impact or possibility for implementation. The result today is that unless conduct transgresses a law, or a defined right or entitlement, not much governs how players in the “street” level conduct themselves. This can create a free-for-all environment.There are several potential legal questions that could come to a boil in the “hard card” market in 2007 because of lack of any self-enforcement. The first could be trademark/service mark and branding infringement cases. As the hard card market begins to experience shrinking margins, desperation may motivate some players to copy cards or “trade dress” (or appearance of a card) to take business away from companies and cards that have not registered their marks. This may even extend to the stored value business and online sales of calling cards depending on how desperate some players may become. Likewise, those companies and individuals that have properly perfected their “trade dress” will be keen to enforce their rights. In defending against such Infringement Actions, the defenses of accused infringers will be shaped by their conduct and will implicate what may or may not have been ethical, or proper, under the circumstances in order to prevail at trial. The courts generally do not look favorably upon defenses predicated on “unclean hands,” and juries even less so. A second potential area of dispute could be misrepresentations to consumers and retailers about service quality or business stability. There could be tort liability, and part of the proof is the reasonable conduct of the parties, in addition to the truth of statements that are made. Third, I see cases regarding bad service or wrongful disconnection of cards from under-the-radar companies growing fast. Many providers that were under-the-radar must now make the choice whether to comply with state and federal regulations. Some are opting not to comply, or obtain proper licensing in order to avoid past liabilities or fines. This will have implications in the distribution markets when these players are eventually caught in state or federal regulatory enforcement actions, and their service for the cards abruptly terminated. This scenario may be true for the sale of cards both online, and through traditional distribution channels.More on point to your question SAMY, it sounds like you are relatively thick-skinned to the ethical or unethical conduct of others in the industry. You are probably not alone in that type of perspective. Although I imagine it would be a “guilty pleasure” to see the details of someone’s legal soap opera in a Legal Line article, I have no disposition to do so. I do think the industry can substantially benefit from a model code of ethics, but only when a strong industry association has taken the lead, and has industry support, to do so. In the meanwhile, keep an eye out for the potential legal questions for “hard” card distribution in 2007 that I mentioned, and if something like that happens – contact your local counsel immediately.Good Luck and Success in the Industry.Send your questions

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