August 2006 - Legal Affairs

Roll the Tape…But Let ‘Em Know

By Edward F. Glynn Jr. and Ronald M. Jacobs

“Let’s go to the tape.” Just as many sporting events are judged not only on the referee’s memory or visual acumen, but through the use of instant replay, so too many direct response companies record calls to prove what took place on the call. And well they should: a recording played back to an angry customer can demonstrate that he or she really did say “yes” to an offer or a series of recordings played back to a regulator can prove that the script really did disclose all of the material terms and conditions.

Recording calls is not a panacea to all problems and can raise additional concerns. One of the difficulties with recording-especially on outbound calls-is providing notice and consent in those states that require both parties to the conversation to agree to be recorded. The Supreme Court of California has just ruled that its two-party consent law applies to any call made to or from the state, regardless of whether the company is located in a one-party consent state.

We will discuss the California case and its ramifications later, but first let’s look at when recording is required and when it is a good idea. Then we’ll discuss some of the pitfalls that go along with recording and offer some suggestions for avoiding these problems.

There are two primary regulations that require part or all of certain telephone calls to be recorded: the Telemarketing Sales Rule (TSR) and Regulation E, which governs certain debit card transactions.

The TSR. The TSR broadly applies to all outbound telephone sales calls, but generally does not apply to inbound calls. The TSR does apply to any upsells during telephone calls, even if the initial call is not covered by the TSR.

The TSR mandates recording in two situations. First, when the call involves a free-to-pay conversion using pre-acquired account information. In that case, a company must record the entire telemarketing transaction, and the FTC has made clear that just recording a confirmation close or similar portion of a call is not sufficient.

Second, the TSR provides that a company must obtain express verifiable authorization when the customer is using a novel form of payment (e.g., a check by phone, mortgage billing, etc.). A company may obtain authorization by getting the consumer’s signature, sending written confirmation that satisfies certain conditions, or recording the authorization and making it available to the customer and the customer’s bank (or other billing entity) upon request. If a company uses the recording option, the recording must include the number, dates and amount(s) of the charges; the customer’s name, telephone number and billing information; and the date of the authorization.

Regulation E. Recording is also required when a customer is using a debit card to make a purchase involving recurring payments (either for a continuity program or for a multi-pay purchase). Regulation E requires a signed, written authorization before recurring charges can be made from a debit card. Under the E-Sign Act, a company can obtain an electronic signature by recording the customer’s consent to the charges. In order to be considered an electronic signature, the recording must include all material terms and conditions, and the consumer must consent to give his or her electronic signature.

The TSR and Section 5 of the Federal Trade Commission Act require companies to obtain the express informed consent of consumers prior to charging their credit or debit cards. The TSR mandates that companies retain proof of this consent for at least 24 months from the date of the transaction.
One of the easiest ways to maintain proof of consent is through a recording of a call. Absent a recording, depending on the situation, a company would have to demonstrate that it uses specific scripts and that its sales reps always follow such scripts.

In some instances, companies record only portions of calls (whether to save money on storage space or for technical reasons). The FTC has been very skeptical of partial recordings, because it believes that a “confirmation close” may not reflect the actual terms of the sale. Therefore, it is advisable to record the entire call and not just a portion of the call.

At the same time, if a regulator launches an investigation, it may become incredibly expensive and time consuming to produce hour upon hour of recordings. Having technology in place that can select certain calls or ranges of calls can help provide a more reasonable sample to a regulator.

Another important aspect of recording is access to specific calls. The system should be able to provide the call associated with a specific transaction and not have to be searched by date and time. Similarly, the system should be able to provide employees who perform quality control with sample calls for review.

In a decision released in mid-July, the California Supreme Court held that California’s two-party consent law applies to all calls made to or from California. Thus, companies must either determine how to segregate calls to and from customers in California and obtain consent to record, or they must obtain consent on all calls.

An obvious question is how does someone know that a company is recording his or her call? The case in California provides a good example. In that case, several customers filed a complaint with the NASD for breaches of fiduciary duty and fraud in the sale of stock. The complainants, who were residents of California, dealt exclusively with a Georgia office of the brokerage company. Through the NASD proceeding, they learned that all of their calls had been recorded, and they sued the brokerage company in California for violations of California’s wiretap laws.

It is easy to envision a similar scenario in the direct-response world: a customer complains that he or she did not consent to an order or the customer files a formal complaint with a regulatory body (or even files a lawsuit) and the company produces the recording to rebut the allegations. The company is then hauled into court for violating state laws requiring two-party consent. Thus, the most likely time the recording is going to be at issue is when the customer has complained about the transaction.

The court determined that the brokerage company did not have notice that it would be subject to the California law (because it could have presumed that Georgia’s one-party consent law applied) and would not be required to pay damages to the plaintiffs. The court made clear that this would not be the case in the future.

What are the ramifications? Companies can no longer rely on the argument that federal law or the law of the state from which they are calling only mandates one-party consent. They must look to the law where the consumer is located. Thus, for inbound calls that are recorded, it is a good idea to include either a recording stating that the call will be recorded, or have the representative ask permission to record the call (he or she can end the call if permission is not given). Outbound calls are harder to deal with, as many outbound callers may believe-with some reason-that adding a recording notice to the opening of the call may kill any reasonable prospect that the consumer will continue to listen. If you are placing calls to a two-party consent state, it may only be possible to record portions of the call-after obtaining consent to record.

Recording can be a powerful tool to protect your company, but it requires the right technology and the right disclosures. It also-of course-requires that the calls themselves be fully compliant with all applicable laws and regulations.

Edward F. Glynn Jr. is a partner at Venable LLP, a law firm based in Washington, D.C. He can be reached at (202) 344-4805, or via e-mail at efg
[email protected]
. Ronald M. Jacobs is an attorney with Venable. He can be reached at (202) 344-8215, or via e-mail at [email protected].


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