FTC on the DNC Warpath

By Jeffrey D. Knowles and Jennifer L. McVey

The Federal Trade Commission (FTC) has once again cracked down on violators of the National Do Not Call (DNC) Registry. The Commission recently announced six settlement agreements with major retailers and marketers, bringing the total number of settlements to 34 since the Registry was established in 2003. The total amount of civil penalties that have been recovered as a result of those settlements has now reached $16 million.

Strict monitoring of compliance with the Registry is likely to continue, with each settlement helping to further clarify the FTC’s interpretation of Do Not Call regulations. The companies targeted by the latest enforcement actions include such well-known names as Ameriquest Mortgage Company, Craftmatic Industries (makers of automatic beds), ADT Security Services, Guardian Communications and Global Mortgage Funding. Their collective settlements resulted in a total of $7.7 million in civil penalties, with another $7.8 million in civil penalties suspended based on Guardian Communications’ inability to pay. The largest penalty-$4.4 million-was levied against Craftmatic. In addition to these fines, the FTC is poised to take further action against Global Mortgage Funding in federal district court.

Companies that want to continue their successful marketing practices without becoming the FTC’s next example of how not to telemarket should pay attention to the FTC’s most recent guidance on the Do Not Call regulations.

“EXPRESS AUTHORIZATION”
The FTC has made clear that using sweepstakes entry forms to obtain phone numbers does not create an established business relationship with the entity conducting the sweepstakes, nor does it substitute for “express authorization” to call the numbers obtained. In its complaint against Craftmatic, the FTC alleged that that company and its vice president of marketing, Eric Krafstow, (who is also a defendant in the action), held a sweepstakes to win a free Craftmatic bed, in which the sweepstakes entry form required participants to enter their phone numbers. Entrants were told that their phone number was also their sweepstakes entry number. The form did not indicate to entrants that the number they gave would then be used to place sales calls, and Craftmatic did not otherwise seek entrants’ express consent to call. Where entrants gave numbers that were discovered to be on the DNC Registry, Craftmatic sent them a confirmation letter asking for verification of the phone number. The letter asked only for verification of the number, and repeated that an entrant’s telephone number was their entry number, while failing to inform entrants that their phone numbers would be used to place sales calls. FTC alleged that Craftmatic then placed sales calls to the phone numbers obtained through sweepstakes entries, including calls to phone numbers that were listed on the DNC Registry. Under the settlement agreement, Craftmatic will pay $4.4 million in civil penalties.

The lesson of the Craftmatic settlement is that a sweepstakes entry does not suffice for the “inquiry” that can establish a prior business relationship-at least not without clearly disclosing to entrants that their entry form information might be used for marketing purposes. Likewise, completion of an entry form that does not disclose the use of information to conduct sales calls does not qualify as an “express authorization.”

NON COMPANY-SPECIFIC INQUIRIES
The FTC has previously indicated that companies that obtain telephone numbers from third-party lead generators are responsible for the practices those lead generators use to obtain telephone number information. The Commission has also stated the when inquiries are received in response to websites that offer general information, and are not specific to a certain company, the lead generators who run those sites must disclose to consumers that their information will be used by third parties for the purpose of making sales calls.

In its recent complaint against Ameriquest, the FTC alleged that Ameriquest’s telemarketers called numbers listed on the DNC Registry. Although the company had obtained the phone numbers in question through third-party lead generators, the FTC found that Ameriquest was ultimately responsible for the conduct of its lead generators in obtaining the numbers. The lead generators had enticed consumers to provide their phone numbers using websites that offered information about other products, including financial information. The FTC’s complaint reasoned that because consumers who gave their phone numbers were not making inquiries or reaching out to Ameriquest in particular, no business relationship was established. Ameriquest will pay $1 million in civil damages under its settlement with the FTC.

When using numbers from lead generators, in order to take advantage of the safe-harbor provisions in the DNC Registry rules, telemarketers must ensure that the entity generating the lead disclose (1) that the consumer will be called for marketing purposes; (2) the maximum number of calls the consumer can expect to receive; and (3) if possible, the identity of the parties who will be making the marketing calls.

MONITOR THE CONDUCT OF AFFILIATES
In several recent enforcement actions, the FTC has held that if a company has affiliates who are authorized dealers of its products, that company will be held responsible for the affiliates’ telemarketing practices. In the most recent action, the FTC charged ADT Security Services and two of its authorized dealers with telemarketing to consumers whose numbers were listed on the Do Not Call Registry. Even though the authorized dealers used their own telemarketing resources, the FTC alleged that ADT was responsible for all of the illegal calls. The complaint against ADT emphasized that the company provided extensive marketing materials to its authorized dealers, and that the authorized dealers had contracts with ADT under which they would become subcontractors on any of the security systems contracts they obtained while marketing on ADT’s behalf.

The FTC’s recent complaint against ADT partially echoes its 2005 consent agreement with DirecTV. As in the DirecTV complaint, the FTC alleged that ADT failed to conduct the requisite due diligence to ensure that its affiliates had policies in place to prevent violations of the DNC Registry rules. ADT’s contracts with authorized dealers did not adequately address compliance issues and potential violations. These two cases establish that not only must policies be in place to prevent violations, but contracts must address potential violations, provide for monitoring of authorized dealers, and allow for dissolution of the contract (or at minimum non-payment) if DNC registry rules are violated. The FTC has allowed the use of third-party compliance monitors, but only if the company first conducts due diligence of the third-party monitor and the reports from the monitor are carefully reviewed and utilized.

Although areas of ambiguity still exist in the FTC’s enforcement of the regulations governing the Do Not Call Registry, the number and size of those areas shrink with each enforcement action. It is critical that marketers monitor the FTC enforcement environment to ensure that their practices, and the practices of their vendors, do not run afoul of the Commission’s most current guidance.

Jeffrey D. Knowles manages Venable LLP’s Government Division and heads the firm’s Advertising and Marketing Practice Group. Knowles is a past chairman of the ERA Board of Directors. He can be reached at (202) 344-4860. Jennifer L. McVey is an attorney with Venable. She can be reached at (202) 344-4338.