Revised TSR Presents New Challenges

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Important revisions to the heavily enforced Federal Trade Commission's Telemarketing Sales Rule take effect March 31. Most marketers are aware of parts of the amended rule, notably the creation of a national do-not-call list and restrictions on using automatic dialers.


However, the revised rule contains other important restrictions, including telemarketing of free trial offers, marketing with preacquired account information and charitable solicitations. Because the rule covers not just marketers, but also suppliers and vendors to those engaged in telemarketing, all businesses involved in direct marketing should take careful notice.


Who is covered? The TSR has been in effect since 1995. It covers not just telemarketers who solicit consumers, but suppliers who assist or facilitate telemarketers. The amended rule incorporates a provision of the USA Patriot Act, the omnibus legislation enacted after 9/11, to include for-profit telemarketers who solicit contributions on behalf of charities.


The amendment does not change the exemptions for long-distance telephone companies, airlines, financial institutions and insurance companies operating under state law, though third parties calling on behalf of such companies are subject to the rule.


Restrictions on free-to-pay conversions. A popular marketing tool that has come under recent regulatory fire is the free-to-pay conversion. This technique offers consumers a free trial period for a good or service, followed by an automatic conversion to a pay service. Examples are benefits programs, monthly Internet services and other continuity programs.


Because such programs operate typically as a negative option, requiring the consumer to affirmatively cancel the service during the trial period or else be billed, the programs are being scrutinized to ensure that adequate disclosures are provided. The amended rule articulates the type of disclosures that must be made before a customer pays for goods or services.


These include the cost of the offer; all material terms and restrictions; the company's refund policy; all material terms of the negative-option feature, including that the customer's account will be charged unless the customer affirmatively cancels; the date the charges will be submitted for payment; and the specific steps the customer must take to avoid charges, such as a toll-free number to call to cancel.


Preacquired account information. Marketers who use a customer's account of billing information legally acquired from a third party are subject to increased restrictions. Because of privacy concerns, telemarketers are not permitted to buy or sell unencrypted consumer account numbers.


Moreover, free-to-pay conversions using preacquired account information must record the entire telemarketing transaction, not just the verification, and must obtain the customer's express, informed consent to charge the particular account number, requiring the customer to recite at least the last four digits of the account to be charged.


Enhanced restrictions on atypical payment methods. The amended rule expands the types of billing methods that require proof of a customer's authorization to include any billing method that is not protected by Regulation Z - the Truth in Lending Act (typically credit cards), or Regulation E - The Electronic Fund Transfer Act (typically debit cards).


These additional payment methods include check by phone (ACH check debiting) or billing to a utility bill. When charging a customer using one of these methods, the marketer needs the consumer's express, verifiable authorization.


Typical authorization is an audio recording that confirms the consumer's authorization of the charges and the receipt of the number of charges, the amount, the date of the charges, the customer's name, the customer's billing information, a customer service telephone number and the date of the transaction.


A marketer also may accept written authorization from the customer or - except in free-to-pay conversions with preacquired account information - mail a written confirmation via First-Class that clearly discloses the nature of the letter on the outside of the envelope and contains all the terms and conditions of the billing program.


Charitable solicitations. As discussed above, the amended rule covers for-profit telemarketers who solicit on behalf of charities via interstate commerce. The rule requires the telemarketer to identify the charitable organization and that the call is a solicitation for a charitable contribution.


Pre-emptive lawsuits? The formal publication of the amended TSR was greeted with lawsuits filed by certain telemarketing businesses, the Direct Marketing Association and the American Teleservices Association in federal courts in Oklahoma and Colorado, respectively. These lawsuits aim to stop parts of the revised rule, specifically the enactment of the do-not-call list and restrictions on automatic dialers and use of preacquired account information.


However, the filing of the lawsuits in and of themselves will not stop the regulation from taking effect. The court must enter an injunction to preclude the changes from going into effect, and even then the lawsuits do not attempt to stop the other parts of the rule.


Regardless of how the lawsuits shake out, marketers and suppliers should review their scripts and marketing programs to ensure they comply with the amended rule.


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