TECHNOLOGY LAW GROUP, LLC Telecommunications Agreements Ins & Outs ©

Lawyers Axiom Most litigation is won or lost long before you get to the courthouse steps.

Agent Contracting Understanding the Concepts of Agency and Resale

Agent vs. Reseller Distinction Agent: does not purchase a service or product from a supplier, and it may not sell that product under its own name. Reseller: an entity that purchases a service or product from a supplier (usually a telecommunications carrier), sets the price of that service or product, and sells it under its own name to its customers.

Agent vs. Reseller Distinction: Reseller Characteristics White-label (branded) service Customer views them as supplier Resellers take advantage of and make their profit from the spread between wholesale price obtained by purchasing at volume and the higher retail price generally available to end-user customers Resellers are responsible for paying telecom taxes, fees, and obligations The resale process may be regulated at the federal and state levels

Sells service of another company and on its behalf (no private branding) Agent is an agent of the supplier (telecommunications carrier) Agents sell the carriers service or product at rates, terms, and conditions set by the supplier Agent makes its profit through a commission the supplier pays for selling the suppliers service or product Absent unusual circumstances, the distribution of telecommunications services and products is not subject to regulation Agent vs. Reseller Distinction: Agent Characteristics

Telecom regulators are generally concerned about the quality, price, and availability of telecommunications services to the residents of their state or the citizens of the country; since all actions relating to these issues are performed by resellers and agents, resale may be regulated but distribution generally is not. Agent vs. Reseller Distinction: Regulatory Issues

Contracting Issues: The Basics Operating Structure Regulatory Approvals (if applicable) Clear and Complete Agreements Operate Your Business in a Manner Consistent With Your Agreements Maintain Complete Written Records

Contracting Issues: The Basics Operating Structure Many telecom litigants fail to properly address the matters necessary to form a proper entity (e.g., corporation, limited liability company) with the authority to conduct business in each marketplace.

Contracting Issues: The Basics Regulatory Approvals Failure to obtain required regulatory approvals (federal, state and local) subjects you to enforcement actions by regulatory agencies and may limit your ability to enforce agreements in litigation. CPCNs, Business Licenses, etc. Tariffs Exemption certificates USAC

Contracting Issues: The Basics Clear and Complete Agreements No handshake deals, insist on a written agreement. Even friendly parties need clear, tailored agreements. Negotiate! Dont just sign the providers agreement. Most agreements are poorly drafted and do not address key issues. Provider agreements protects their interests, not yours. Incomplete, unclear or one-sided agreements cause litigation and make litigation more difficult and expensive.

Contracting Issues: The Basics Operate Your Business in a Manner Consistent With Your Agreements Terms of provider agreements should trickle down to retail agreements Operational & business policies should be consistent with your agreements Encourage (force) intra-departmental communication

Contracting Issues: The Basics Maintain Complete Written Records Document everything Observe dispute and termination notice requirements Memorialize key meetings, conversations and understandings Maintain clear and complete financial records

Distribution Agreements – Important Points Distinctions Between Resellers & Agents are Often Not Properly Reflected in Distribution Agreements

Distribution Agreements – Important Points Carrier Agreements often confuse distinctions between resellers & agents which may cause: Improper allocation of liability for customer conduct Improper allocation of liability for customer debts Agreements must properly reflect the distinctions between resellers & agents

Distribution Agreements – Important Points Five Most Troubling Issues We See in Agent-Carrier Agreements 1.Commissions 2.Customer Ownership 3.Revenue Commitments/Rates 4.Dispute Resolution 5.Post-Contract Considerations

Distribution Agreements – Important Points 1.Commissions a.Rates 1.Rates should be clear & unambiguous (inter, intra, intl, switched, dedicated, MRCs, shortfalls, ETC, etc.) 2.If different rates apply by service type, each rate should be listed with the corresponding service 3.Needs to clearly specify whether based on billed or collected revenues

Distribution Agreements – Important Points 1. Commissions b. Bad debt, fraud 1.Should be carriers risk, not the agents – especially when carrier retains the right to reject any of the prospects you bring and controls the collection process

Distribution Agreements – Important Points 1. Commissions c. Billed vs. Collected Revenue 1.Preference is to be to paid on billed revenue 2.Does the carrier have any obligations to collect? What happens if they dont make a good effort to collect? 3.What is your role/responsibility in the collection process? Are you to be reimbursed for costs associated with this role?

Distribution Agreements – Important Points 1. Commissions d. When Paid/Duration 1.Agreement needs to specifically identify the date (each month, etc.) on which you will be paid and the manner of payment 2.Evergreen – you should be paid as long as the customer is on the carriers service 3.Obligation to pay commissions should not be tied to any contingencies outside of the agents direct control 4.Reports – should be included with each commission check and should explain the calculation of the commission (e.g, by customer, showing traffic, applicable commission rate and all applicable offsets or holdbacks)

Distribution Agreements – Important Points 1. Commissions e. Right to Audit – Critical to create strong incentive not to cheat 1.Must allow audits reasonably and frequently 2.Allow agent to use its auditor 3.Require cooperation 4.Agent pays if no material problems found (e.g. errors do not exceed an agreed percentage); reseller pays if problems exceed this percentage 5.Other penalties for cheating

Distribution Agreements – Important Points 2. Customer Ownership a.Who owns? 1.Agent vs. Reseller

Distribution Agreements – Important Points 2. Customer Ownership b. Non-compete/right to move issues 1.Agent should retain the right to move customer when carriers rates or service are poor and/or non-competitive 2.If you have a NC, it should be limited to a short period of time (e.g., carrier has 10-days to accept that customer or agent can take elsewhere)

Distribution Agreements – Important Points 2. Customer Ownership b. Non-compete/right to move issues 3. No NC if carrier fails to pay full commissions (i.e., failure to pay full commissions due on any customer, lets you out of NC for all customers) 4. No NC if carrier sells 5. No NC if bad service or rates 6. Solicitation vs. response to customer issue

Distribution Agreements – Important Points 3. Revenue Commitments/Rates a.Rule #1 – no volume and/or revenue commitments. At most agree to a tiered commission structure – i.e., reduced commission percentage for lower sales – not complete loss

Distribution Agreements – Important Points 3. Revenue Commitments/Rates b. Rule #2 – if you must commit, so must the carrier 1.QoS/SLA/Availability of service 2.Rate protection – if carrier increases rates, or more likely, fails to reduce rates, it can mean less business for agent and have negative implications on your ability to sell

Distribution Agreements – Important Points 4. Dispute Resolution a.Remedies 1.Determine remedial obligations of the parties short of court (i.e., specific performance, etc.) 2. Require escrow of disputed commissions

Distribution Agreements – Important Points 4. Dispute Resolution b. Forum Selection 1.Insist on a clearly defined dispute resolution process (i.e., informal and formal) with fixed periods, documentation requirements and full written explanation of reasons for carrier decisions 2.Insist on clear choice of law and venue/forum selection provision 3.Dont fight in their backyard (comprise, P chooses forum) 4.Dont waive jury trial if you are the small guy

Distribution Agreements – Important Points 4. Dispute Resolution c. Arbitration vs. Litigation 1.Arbitration favors the party with access to the documents 2.Advantages of arbitration (with your sub-agents)

Distribution Agreements – Important Points 5. Post-Contract Considerations 1.Commissions! 2.Reporting 3.Right to audit 4.Non-compete obligations 5.Confidentiality considerations 6.Non-solicitation

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