AT&T’s ‘Free Call’ Bill: $2 Million

Guess who got stuck with a big bill for all those “free” international calls touted by outfits like FuturePhone? None other than AT&T, which has filed a lawsuit in Iowa claiming that “deceitful and unlawful schemes” like FuturePhone’s caused a jump from $2,000 per month to $2 million per month in the fees billed AT&T by an Iowa rural telco.

Filed in the U.S. District Court for the Southern District of Iowa, Central Division, AT&T’s lawsuit seeks to stop FuturePhone as well as the telcos who provide local infrastructure from continuing with their operations that use regulatory-fee arbitrage and VoIP to provide international calls for only the price of a long-distance call to Iowa. Though the case was just filed on Jan. 29, it has already apparently caused FuturePhone to shutter its service, and has produced nothing but “no comment” replies from the Iowa LECs we contacted who were also named in the suit.

“This is just the latest in a long line of get-rich-quick schemes that bilk others to make a profit,” said an AT&T spokesperson. The lawsuit claims that operations like FuturePhone’s are in violation of several statutes, including Iowa state laws as well as previous FCC decisions.

Some background, for those not familiar with how intricate cross-network billing can get: When a long-distance call is “terminated,” if a long-distance provider like AT&T doesn’t own the local lines where that call is going to, it must pay a fee to the company that does. Even though such termination fees are typically higher in rural areas, since there are usually relatively few customers in the sticks big long-distance providers can easily balance the cost with their other businesses.

In Iowa, higher than average termination fees (as much as 13 cents per minute, according to AT&T) have been lately combined with fiber-based Internet access to provide a pretty good place for a VoIP-based gateway, which can then provide a way to cheaply reach foreign PSTNs. The loophole comes from some method of subtracting the money paid for foreign terminations from the amount gained by terminating calls in Iowa. While the margins are pennies-or-less per call, the lure of avoiding the high cost of international calls apparently caught on quickly, to the tune of hundreds of thousands of minutes a month, according to AT&T.

And when AT&T’s average monthly bill to one such Iowa telco, the Superior Telephone Cooperative, went from $2,000 to $2,000,000, it was time for Ma Bell to call the fine-suited folks at Sidley Austin LLP to try to close the loophole down.

Boiled down, AT&T’s main argument is that because the calls are not actually “terminated” in Iowa — AT&T says Iowa is just a midpoint in what is really an international call — AT&T shouldn’t have to pay the LECs the termination fees. Telco legal sources we talked to said that while the suit’s merit can certainly be contested, what it does immediately is give AT&T a legal reason to stall payments of such monthly bills, which could effectively strong-arm the startups out of business.

In FuturePhone’s case it seemed to have done the trick, since FuturePhone’s website still carries a big red “this service is discontinued” banner, and contact numbers for the company have all apparently been disconnected. The person who answered the phone at Superior Coop referred us to another Iowa LEC, Great Lakes Communications, which was also named in AT&T’s suit. There, we talked by phone to someone who would only identify himself as “Josh,” who said when asked about FuturePhone, “I’m not going to tell you that stuff.”

While some free-call operations (including Free Call Planet, also named in AT&T’s suit) still seem to be operating in Iowa, AT&T did leave room for yet-unnamed firms at both the website and telco level to be added to the suit. The bottom line, for firms seeking to make a buck by using regulatory loopholes: Good luck in court, because the legal equivalent of the Yankees just showed up in Mudville.