FTC Actions Put Suppliers on Notice

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No longer content with simply going after telemarketers, the Federal Trade Commission is now taking aggressive steps against companies that either knew or should have known that their telemarketer clients were violating the law.


Recent five- and six-figure settlements with list managers and enforcement actions against Automated Clearing House processors show that the FTC has gotten serious about enforcing the Telemarketing Sales Rule against companies that are not part of the sales process but that assist or facilitate telemarketers who break the law. Accordingly, companies that supply services to telemarketers must take affirmative steps to investigate whether their clients are complying with the law.


The Telemarketing Sales Rule. Though many in direct marketing understand what a highly regulated industry telemarketing is, some of the same people also are under the false impression that the TSR applies only to those who actually engage in telemarketing.


Since its inception in 1995, the TSR has applied not only to telemarketers, but also to those who provide substantial assistance or support to a telemarketer when they knew or should have known that the telemarketer was violating the TSR.


The theory behind the "assisting or facilitating" provision is that telemarketers come and go, so enforcement that deals only with telemarketers might not end misconduct. By imposing obligations on a supplier whose services are required by telemarketers, the FTC hopes to achieve greater overall compliance.


Thus, the TSR imposes affirmative obligations on businesses like list brokers, customer service agencies, printers, fulfillment houses and processors, obligations that require such suppliers to investigate whether the telemarketer is in compliance.


The phrase in the TSR holding suppliers responsible for what they "should have known" makes clear that liability cannot be avoided simply by sticking one's head in the sand and ignoring a telemarketer's illegal acts. Though this provision has been on the books since 1995, the FTC had shown little interest in enforcing the assisting or facilitating provisions against supplier companies. That has now changed.


The list manager actions. After lengthy investigations into the list brokerage industry that initially focused on compliance with privacy issues such as Gramm-Leach-Bliley, the FTC changed focus to compliance with the TSR. As part of its investigation, the FTC began seeking proposed marketing materials such as ad copy and telemarketing scripts from the files of list managers.


After years of sporadic enforcement against telemarketer suppliers, list managers suddenly were being held responsible if these ads or scripts violated the TSR and the list was being used to market obviously improper products such as an "advance fee" credit card. Because the list manager knew or should have known that these materials violated the TSR, the FTC began to use its power to hold list managers culpable even though the rentals were approved by the list owners.


Examples of enforcement against list managers became public in August, when the FTC announced three settlements against Carney Direct Marketing, List Data Computer Services and NeWorld Marketing. Each settlement is nearly identical except for the amounts paid to the government, which were $25,000, $100,000 and $62,500, respectively. The settlements expressly require the list managers to make affirmative efforts to ensure that telemarketers to whom the lists are rented comply with the TSR.


Such efforts include obtaining and reviewing sample scripts before renting any list to confirm that the rental will not assist the telemarketer in violating the law. In addition, the list managers are required to investigate whether the telemarketers are violating the majority of provisions of the TSR, including advance-fee prohibitions, free-to-pay conversion requirements and do-not-call list restrictions.


The ACH actions. Before the three list manager actions, the FTC filed enforcement actions against another type of telemarketer supplier: ACH processors. In a case brought in July 2003, the FTC obtained a temporary restraining order and the appointment of a monitor over Electronic Financial Group and its executives, who provided ACH processing for telemarketers and also marketed their own advance-fee debit cards.


More recently, in February 2004, the FTC sued three Phoenix-based ACH processors, including First American Payment Processing, accused of knowingly processing electronic payments for telemarketers engaged in violating the TSR, including the advance-fee prohibitions.


Those ACH processors entered into a preliminary injunction that, among other things, prohibits them from processing any credit-related goods or services and, even more broadly, processing any debits from an outbound call unless the seller had a pre-existing business relationship.


What does this mean to suppliers? The FTC actions against list managers and ACH processors show that the FTC is now looking well beyond simply holding a telemarketer liable for its own misconduct. Businesses that supply a telemarketer must perform a due diligence search to ensure that the telemarketer's acts comply with the TSR.


At a minimum, due diligence should include a review of the marketing materials with an eye toward the TSR's restrictions or obtaining legal approval that the materials comply with the TSR. And of course, all due diligence efforts should be documented by a paper trail in case the FTC investigates.


Though complaints are a fact of life for any business, if you supply services to a telemarketer and become aware that a significant number of consumers are complaining about a particular sales tactic or other deception, you have just been placed on notice of the need to investigate further.


Given the FTC's enormous enforcement power, telemarketer suppliers should establish a compliance program that meets their obligations under the law.


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