[Federal Register: January 29, 2003 (Volume 68, Number 19)]
[Rules and Regulations]
[Page 4579-4679]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29ja03-18]
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Part III
Federal Trade Commission
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16 CFR Part 310
Telemarketing Sales Rule; Final Rule
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FEDERAL TRADE COMMISSION
16 CFR Part 310
Telemarketing Sales Rule
AGENCY: Federal Trade Commission.
ACTION: Final Amended Rule.
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SUMMARY: In this document, the Federal Trade Commission (``FTC'' or
``Commission'') issues its Statement of Basis and Purpose (``SBP'') and
final amended Telemarketing Sales Rule (``amended Rule''). The amended
Rule sets forth the FTC's amendments to the Telemarketing Sales Rule
(``original Rule'' or ``TSR''). The amended Rule is issued pursuant to
the Commission's Rule Review, the Telemarketing and Consumer Fraud and
Abuse Prevention Act (``Telemarketing Act'' or ``Act'') and the Uniting
and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act (``USA PATRIOT Act'').
EFFECTIVE DATES: The amended Rule will become effective March 31,
2003. Full compliance with Sec. 310.4(a)(7), the caller identification
transmission provision, is required by January 29, 2004. The Commission
will announce at a future time the date by which full compliance with
Sec. 310.4(b)(1)(iii)(B), the ``do-not-call'' registry provision, will
be required. The Commission anticipates that full compliance with the
``do-not-call'' provision will be required approximately seven months
from the date a contract is awarded to create the national registry.
ADDRESSES: Requests for copies of the amended Rule and this SBP should
be sent to: Public Reference Branch, Room 130, Federal Trade
Commission, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The
complete record of this proceeding is also available at that address.
Relevant portions of the proceeding, including the amended Rule and
SBP, are available at http://www.ftc.gov.
FOR FURTHER INFORMATION CONTACT: Catherine Harrington-McBride, (202)
326-2452, Karen Leonard, (202) 326-3597, Michael Goodman, (202) 326-
3071, or Carole Danielson, (202) 326-3115, Division of Marketing
Practices, Bureau of Consumer Protection, Federal Trade Commission, 600
Pennsylvania Avenue, N.W., Washington, DC 20580.
SUPPLEMENTARY INFORMATION: The amended Rule: (1) retains most of the
original Rule's requirements concerning deceptive and abusive
telemarketing acts or practices without major substantive changes; (2)
establishes a national ``do-not-call'' registry maintained by the
Commission; (3) defines ``upselling'' to clarify the amended Rule's
application to these transactions, requires specific disclosures for
upsell transactions, and expressly excludes upselling transactions from
certain exemptions in the amended Rule; (4) requires that sellers and
telemarketers accepting payment by methods other than credit and debit
cards subject to certain protections obtain express verifiable
authorization from their customers; (5) retains the exemptions for pay-
per-call, franchise, and face-to-face transactions, but makes these
transactions subject to the national ``do-not-call'' registry and
certain other provisions in the abusive practices section of the Rule;
(6) specifies requirements for the use of predictive dialers; (7)
requires disclosures and prohibits misrepresentations in connection
with the sale of credit card loss protection plans; (8) requires an
additional disclosure in connection with prize promotions; (9) requires
disclosures and prohibits misrepresentations in connection with offers
that include a negative option feature; (10) eliminates the general
media and direct mail exemptions for the telemarketing of credit card
loss protection plans and business opportunities other than business
arrangements covered by the Franchise Rule\1\; (11) requires
telemarketers to transmit caller identification information; (12)
eliminates the use of post-transaction written confirmation as a means
of obtaining a customer's express verifiable authorization when the
goods or services are offered on a ``free-to-pay conversion'' basis;
(13) prohibits the disclosure or receipt of the customer's or donor's
unencrypted billing information for consideration, except in limited
circumstances; and (14) requires that the seller or telemarketer obtain
the customer's express informed consent to all transactions, with
specific requirements for transactions involving ``free-to-pay
conversions'' and preacquired account information.
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\1\ Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures (``Franchise Rule''),
16 CFR Part 436.
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Statement of Basis and Purpose
I. Background
A. Telemarketing and Consumer Fraud and Abuse Prevention Act.
The early 1990s saw heightened Congressional attention to
burgeoning problems with telemarketing fraud.\2\ The culmination of
Congressional efforts to protect consumers against telemarketing fraud
occurred in 1994 with the passage of the Telemarketing Act, which was
signed into law on August 16, 1994.\3\ The purpose of the Act was to
combat telemarketing fraud by providing law enforcement agencies with
new tools and to give consumers new protections.
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\2\ Statutes enacted by Congress to address telemarketing fraud
during the early 1990s include the Telephone Consumer Protection Act
of 1991 (``TCPA''), 47 U.S.C. 227 et seq., which restricts the use
of automatic dialers, bans the sending of unsolicited commercial
facsimile transmissions, and directs the Federal Communications
Commission (``FCC'') to explore ways to protect residential
telephone subscribers' privacy rights; and the Senior Citizens
Against Marketing Scams Act of 1994, 18 U.S.C. 2325 et seq., which
provides for enhanced prison sentences for certain telemarketing-
related crimes.
\3\ 15 U.S.C. 6101-6108.
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The Telemarketing Act directed the Commission to issue a rule
prohibiting deceptive and abusive telemarketing acts or practices, and
specified, among other things, certain acts or practices the FTC's rule
must address. The Act also required the Commission to include
provisions relating to three specific ``abusive telemarketing acts or
practices:'' (1) a requirement that telemarketers may not undertake a
pattern of unsolicited telephone calls which the consumer would
consider coercive or abusive of his or her right to privacy; (2)
restrictions on the time of day telemarketers may make unsolicited
calls to consumers; and (3) a requirement that telemarketers promptly
and clearly disclose in all sales calls to consumers that the purpose
of the call is to sell goods or services, and make other disclosures
deemed appropriate by the Commission, including the nature and price of
the goods or services sold.\4\ Section 6102(a) of the Act not only
required the Commission to define and prohibit deceptive telemarketing
acts or practices, but also authorized the FTC to define and prohibit
acts or practices that ``assist or facilitate'' deceptive
telemarketing.\5\ The Act further directed the Commission to consider
including recordkeeping requirements in the rule.\6\ Finally, the Act
authorized state Attorneys General, other appropriate state officials,
and private persons to bring civil actions in federal district court to
enforce compliance with the FTC's rule.\7\
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\4\ 15 U.S.C. 6102(a)(3)(A)-(C).
\5\ Examples of practices that would ``assist or facilitate''
deceptive telemarketing under the Rule include credit card
laundering and providing contact lists or promotional materials to
fraudulent sellers or telemarketers. See 60 FR 43842, 43853 (Aug.
23, 1995).
\6\ 15 U.S.C. 6102(a)(3).
\7\ 15 U.S.C. 6103, 6104.
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B. Original Rule.
The FTC adopted the original Rule on August 16, 1995.\8\ The Rule,
which became effective on December 31, 1995, requires that
telemarketers promptly tell each consumer they call several key pieces
of information: (1) the identity of the seller; (2) the fact that the
purpose of the call is to sell goods or services; (3) the nature of the
goods or services being offered; and (4) in the case of prize
promotions, that no purchase or payment is necessary to win.\9\
Telemarketers must, in any telephone sales call, also disclose cost and
other material information before consumers pay.\10\ In addition, the
original Rule requires that telemarketers have consumers' express
verifiable authorization before using a demand draft (or ``phone
check'') to debit consumers' bank accounts.\11\ The original Rule
prohibits telemarketers from calling before 8:00 a.m. or after 9:00
p.m. (in the time zone where the consumer is located), and from calling
consumers who have said they do not want to be called by or on behalf
of a particular seller.\12\ The original Rule also prohibits
misrepresentations about the cost, quantity, and other material aspects
of the offered goods or services, and the terms and conditions of the
offer.\13\ Finally, the original Rule bans telemarketers who offer to
arrange loans, provide credit repair services, or recover money lost by
a consumer in a prior telemarketing scam from seeking payment before
rendering the promised services,\14\ and prohibits credit card
laundering and other forms of assisting and facilitating fraudulent
telemarketers.\15\
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\8\ 60 FR at 43842 (codified at 16 CFR 310 (1995)).
\9\ 16 CFR 310.4(d).
\10\ 16 CFR 310.3(a)(1).
\11\ 16 CFR 310.3(a)(3).
\12\ 16 CFR 310.4(c), and 310.4(b)(1)(ii).
\13\ 16 CFR 310.3(a)(2).
\14\ 16 CFR 310.4(a)(2)-(4).
\15\ 16 CFR 310.3(b) and (c).
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The Rule expressly exempts from its coverage several types of
calls, including calls where the transaction is completed after a face-
to-face sales presentation, calls subject to regulation under other FTC
rules (e.g., the Pay-Per-Call Rule,\16\ or the Franchise Rule),\17\
calls initiated by consumers that are not in response to any
solicitation, calls initiated by consumers in response to direct mail,
provided certain disclosures are made, and calls initiated by consumers
in response to advertisements in general media, such as newspapers or
television.\18\ Lastly, catalog sales are exempt, as are most business-
to-business calls, except those involving the sale of non-durable
office or cleaning supplies.\19\
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\16\ Trade Regulation Rule Pursuant to the Telephone Disclosure
and Dispute Resolution Act of 1992 (``Pay-Per-Call Rule''), 16 CFR
Part 308.
\17\ 16 CFR 310.6(a)-(c).
\18\ 16 CFR 310.6(d)-(f).
\19\ 16 CFR 310.2(u) (pursuant to 15 U.S.C. 6106(4) (catalog
sales)); 16 CFR 310.6(g) (business-to-business sales). In addition
to these exemptions, certain entities including banks, credit
unions, savings and loans, common carriers engaged in common carrier
activity, non-profit organizations, and companies engaged in the
business of insurance regulated by state law are not covered by the
Rule because they are specifically exempt from coverage under the
FTC Act. 15 U.S.C. 45(a)(2); but see discussion below concerning the
USA PATRIOT Act amendments to the Telemarketing Act. Finally, a
number of entities, and individuals associated with them, that sell
investments and are subject to the jurisdiction of the Securities
and Exchange Commission or the Commodity Futures Trading Commission
are exempt from the Rule. 15 U.S.C. 6102(d)(2)(A); 6102(e)(1).
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C. Rule Review and Request for Comment.
The Telemarketing Act required that the Commission initiate a Rule
Review proceeding to evaluate the Rule's operation no later than five
years after its effective date of December 31, 1995, and report the
results of the review to Congress.\20\ Accordingly, on November 24,
1999, the Commission commenced the mandatory review with publication of
a Federal Register notice announcing that Commission staff would
conduct a forum on January 11, 2000, limited to examination of issues
related to the ``do-not-call'' provision of the Rule, and soliciting
applications to participate in the forum.\21\
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\20\ 15 U.S.C. 6108.
\21\ 64 FR 66124 (Nov. 24, 1999). Comments regarding the Rule's
``do-not-call'' provision, Sec. 310.4(b)(1)(ii), as well as the
other provisions of the Rule, were solicited in a later Federal
Register notice on February 28, 2000. See 65 FR 10428 (Feb. 28,
2000). Seventeen associations, individual businesses, consumer
groups, and law enforcement agencies were selected to engage in the
forum's roundtable discussion (``Do-Not-Call'' Forum), which was
held on January 11, 2000, at the FTC offices in Washington, D.C.
References to the ``Do-Not-Call'' Forum transcript are cited as
``DNC Tr.'' followed by the appropriate page designation.
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On February 28, 2000, the Commission published a second notice in
the Federal Register, broadening the scope of the inquiry to encompass
the effectiveness of all the Rule's provisions. This notice invited
comments on the Rule as a whole and announced a second public forum to
discuss the provisions of the Rule other than the ``do-not-call''
provision.\22\ In response to this notice, the Commission received 92
comments from representatives of industry, law enforcement, and
consumer groups, as well as from individual consumers.\23\
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\22\ 65 FR 10428 (Feb. 28, 2000) (the ``February 28 Notice'').
The Commission extended the comment period from April 27, 2000, to
May 30, 2000. 65 FR 26161 (May 5, 2000).
\23\ A list of the commenters and the acronyms used to identify
each commenter who submitted a comment in response to the February
28 Notice is attached hereto as Appendix A. Appendix B is a list of
the commenters and the acronyms used to identify each commenter who
submitted a comment in response to the Notice of Proposed Rulemaking
(``NPRM''), discussed below, including supplemental comments and
comments submitted on the user fee proposal. References to comments
are cited by the commenter's acronym followed by the appropriate
page designation. ``RR'' after the commenter's acronym indicates
that the comment was received in response to the Rule Review.
``NPRM'' after the commenter's acronym indicates that the comment
was received in response to the NPRM. ``Supp.'' after the
commenter's acronym indicates that the comment was received as a
Supplemental Comment. ``User Fee'' after the commenter's acronym
indicates the comment was submitted in response to the request for
comments on the Commission's user fee proposal.
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The commenters generally praised the effectiveness of the TSR in
combating the fraudulent practices that had plagued the telemarketing
industry before the Rule was promulgated. They also strongly supported
the Rule's continuing role as the centerpiece of federal and state
efforts to protect consumers from interstate telemarketing fraud.
Commenters consistently stressed that it is important to retain the
Rule. However, commenters were less sanguine about the effectiveness of
the Rule's provisions dealing with consumers' right to privacy, such as
the ``do-not-call'' provision and the provision restricting calling
times. They also identified a number of areas of continuing or
developing fraud and abuse, as well as the emergence of new
technologies that affect telemarketing for industry members and
consumers alike. Commenters identified several changes in the
marketplace that had occurred in the five years since the Rule was
promulgated and that threatened the Rule's effectiveness. Those changes
included increased consumer concern about personal privacy,\24\ the
development of novel payment methods,\25\ and the increased use of
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preacquired account telemarketing\26\ and upselling.\27\
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\24\ The past several years have seen a greater public and
governmental focus on the ``do-not-call'' issue. Related to the
``do-not-call'' issue is the proliferation of technologies, such as
caller identification service, that assist consumers in managing
incoming calls to their homes. Similarly, privacy advocates have
raised concerns about technologies used by telemarketers (such as
predictive dialers and deliberate blocking of caller identification
information) that hinder consumers' attempts to screen calls or make
requests to be placed on a ``do-not-call'' list.
\25\ The growth of electronic commerce and payment systems
technology has led, and likely will continue to lead, to new forms
of payment and further changes in the way consumers pay for goods
and services they purchase through telemarketing. In addition,
billing and collection systems of telephone companies, utilities,
and mortgage lenders are becoming increasingly available to a wide
variety of vendors of all types of goods and services. These newly
available payment methods in many instances are relatively untested,
and may not provide protections for consumers from unauthorized
charges.
\26\ The practice of preacquired account telemarketing--where a
telemarketer acquires the customer'sbilling information prior to
initiating a telemarketing call or transaction--has increasingly
resulted in complaints from consumers about unauthorized charges.
Billing information can be preacquired in a variety of ways,
including from a consumer'sutility company, from the consumer in a
previous transaction, or from another source. In many instances, the
consumer is not involved in the transfer of the billing information
and is unaware that the seller possesses it during the telemarketing
call.
\27\ The practice of ``upselling'' has also become more
prevalent in telemarketing. Through this technique, customers are
offered additional items for purchase after the completion of an
initial sale. In the majority of upselling scenarios, the seller or
telemarketer already has received the consumer's billing
information, either from the consumer or from another source.
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Following the receipt of public comments, the Commission held a
second forum on July 27 and 28, 2000 (``Rule Review Forum''), to
discuss provisions of the Rule other than the ``do-not-call'' provision
and to discuss the Rule's effectiveness.\28\ Both the ``Do-Not-Call''
Forum and the Rule Review Forum were open to the public, and time was
reserved to receive oral comments from members of the public in
attendance. Both proceedings were transcribed and, along with the
comments received, placed on the public record.\29\
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\28\ References to the Rule Review Forum transcript are cited as
``RR Tr.'' followed by the appropriate page designation.
\29\ Relevant portions of the entire record of the Rule Review
proceeding, including all transcripts and comments, can be viewed on
the FTC'swebsite at http://www.ftc.gov/bcp/rulemaking/tsr/tsr-review.htm.
In addition, the full paper record is available in Room
130 at the FTC, 600 Pennsylvania Avenue, N.W., Washington, DC 20580,
telephone number: 1-202-326-2222.
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Based on the record developed during the Rule Review, as well as
the Commission's law enforcement experience, the Commission determined
to retain the Rule but proposed to amend it to better address recurring
abuses and to reach emerging problem areas.
D. The USA PATRIOT Act of 2001.
On October 25, 2001, the USA PATRIOT Act\30\ became effective. This
legislation contains provisions that have significant impact on the
TSR. Specifically, Sec. 1011 of that Act amends the Telemarketing Act
to extend the coverage of the TSR to reach not just telemarketing to
induce the purchase of goods or services, but also charitable
fundraising conducted by for-profit telemarketers on behalf of
charitable organizations. Because enactment of the USA PATRIOT Act took
place after the comment period for the Rule Review closed, the
Commission did not raise issues relating to charitable fundraising by
telemarketers in the Rule Review.
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\30\ Pub. L. 107-56, 115 Stat. 272 (Oct. 26, 2001).
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Section 1011(b)(3) of the USA PATRIOT Act amends the definition of
``telemarketing'' that appears in the Telemarketing Act, 15 U.S.C.
Sec. 6106(4), expanding it to cover any ``plan, program, or campaign
which is conducted to induce . . . a charitable contribution, donation,
or gift of money or any other thing of value, by use of one or more
telephones and which involves more than one interstate telephone call .
. . .''
In addition, Sec. 1011(b)(2), among other things, adds a new
section to the Telemarketing Act directing the Commission to include
new requirements in the ``abusive telemarketing acts or practices''
provisions of the TSR.\31\ Finally, Sec. 1011(b)(1) amends the
``deceptive telemarketing acts or practices'' provision of the
Telemarketing Act, 15 U.S.C. Sec. 6102(a)(2), by specifying that
``fraudulent charitable solicitation'' is to be included as a deceptive
practice under the TSR.
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\31\ Specifically, Sec. 1011(b)(2)(d) mandates that the TSR
include in its regulation of abusive telemarketing acts and
practices ``a requirement that any person engaged in telemarketing
for the solicitation of charitable contributions, donations, or
gifts of money or any other thing of value, shall promptly and
clearly disclose to the person receiving the call that the purpose
of the call is to solicit charitable contributions, donations, or
gifts, and make such other disclosures as the Commission considers
appropriate, including the name and mailing address of the
charitable organization on behalf of which the solicitation is
made.'' Pub. L. 107-56 (Oct. 26, 2001).
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E. Notice of Proposed Rulemaking.
On January 30, 2002, the Commission published its NPRM, proposing
revisions to the TSR (``proposed Rule'') in order to ensure that
consumers receive the protections that the Telemarketing Act mandated,
and to effectuate Sec. 1011 of the USA PATRIOT Act.\32\ The Commission
proposed a number of changes, including creating a national ``do-not-
call'' registry maintained by the FTC, a ban on receiving from or
disclosing to a third party a consumer's billing information, a
prohibition against blocking caller identification information, and a
requirement that sellers or telemarketers accepting payment via novel
payment methods obtain the customer's express verifiable authorization.
During the course of this NPRM proceeding, the Commission received
about 64,000 electronic and paper comments from representatives of
industry, law enforcement, consumer and privacy groups, and from
individual consumers.\33\ On June 5, 6 and 7, 2002, the Commission held
a forum (``June 2002 Forum'') to discuss the issues raised by
commenters regarding the FTC's proposed revisions.\34\ The forum was
open to the public, and time was reserved to receive oral comments from
members of the public in attendance. During the forum, the Commission
announced that it would accept supplemental comments until June 28,
2002.\35\ The forum proceeding was transcribed and placed on the public
record. The public record, including many comments and all forum
transcripts, has been placed on the Commission's website on the
Internet.\36\
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\32\ 67 FR 4492 (Jan. 30, 2002).
\33\ Of these, more than forty-five were supplemental comments
from organizations and individuals, and about 15,000 supplemental
comments were from Gottschalks' customers submitted by Gottschalks.
Simultaneous with, but separate from, the NPRM proceeding, the
Commission has been exploring possible methods for implementing the
proposed national ``do-not-call'' registry. On February 28, 2002,
the Commission published a Request for Information (``RFI'') that
solicited information from potential contractors on various aspects
of implementing the proposed registry. The RFI comment period closed
on March 29, 2002. On August 2, 2002, the Commission issued a
Request for Quotes to selected vendors. Final proposals were
submitted on September 20, 2002, and are being evaluated by
Commission staff. On May 29, 2002, the Commission published a Notice
of Proposed Rulemaking, soliciting comments on a proposed amendment
to the TSR that would establish the methods by which fees for use of
the registry would be set. 67 FR 37362 (May 29, 2002). The comment
period ended June 28, 2002. The proposed amendment received about
forty comments (cited as ``[Name of Commenter]-User Fee at [page
number]''), virtually all of which argued that the Commission does
not have the authority to issue a user fee, or that it was premature
to propose a user fee because the Commission did not have sufficient
information upon which to base the proposal. The user fee proposal
remains under review as the Commission continues to evaluate the
issues raised in the comments.
\34\ References to the June 2002 Forum transcript are cited as
``June 2002 Tr.'' followed by the appropriate day (I, II, or III,
referring to June 5, 6, or 7, respectively) and page designation.
\35\ June 2002 Tr. II at 254. References to the supplemental
comments received are cited as ``[Name of Commenter]-Supp. at [page
number].''
\36\ Much of the record in this proceeding can be viewed on the
FTC's website at http://www.ftc.gov/bcp/rulemaking/tsr/tsr-review.htm.
In addition, the full paper record is available in Room
130 at the FTC, 600 Pennsylvania Avenue, N.W., Washington, DC 20580,
telephone number: 1-202-326-2222.
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Individual consumers generally favored the Commission's proposals,
particularly with regard to a national ``do-not-call'' registry.
Consumer groups and state law enforcement representatives also
generally supported the proposed amendments, although they expressed
concern about the effect of the proposal on state ``do-not-call''
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and other laws. Business and industry commenters generally opposed the
proposal, but suggested changes that they believed would make the
proposed amendments less burdensome on legitimate business while still
achieving the desired consumer protections. Comments from charitable
organizations focused primarily on the FTC proposal which would require
for-profit telemarketers who solicit on behalf of charitable
organizations to comply with the proposed ``do-not-call'' registry.
Charitable organizations consistently opposed such a requirement. The
comments and the basis for the Commission's decision on the various
recommendations are analyzed in detail in Section II below.
F. The Amended Rule.
The Commission has carefully reviewed the entire record developed
in its rulemaking proceeding. The record, as well as the Commission's
law enforcement experience, leave little doubt that important changes
have occurred in the marketplace, and that modifications to the
original Rule are necessary if consumers are to receive the protections
that Congress intended to provide when it enacted the Telemarketing
Act. Based on that record and on the Commission's law enforcement
experience, the Commission has modified the proposed Rule published in
the NPRM and now promulgates this amended Rule, as described in this
SBP.
The Commission's decision to retain certain provisions of the
original Rule while supplementing or amending others is made pursuant
to the Rule Review requirements of the Telemarketing Act,\37\ and
pursuant to the rulemaking authority granted to the Commission by that
Act to protect consumers from deceptive and abusive practices,\38\
including practices that may be coercive or abusive of the consumer's
interest in protecting his or her privacy.\39\ The Commission's
decision to amend the original Rule also is made pursuant to the
authority granted to the Commission by Sec. 1011 of the USA PATRIOT
Act.
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\37\ 15 U.S.C. 6108.
\38\ 15 U.S.C. 6102(a)(1) and (a)(3).
\39\ 15 U.S.C. 6102(a)(3)(A).
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As discussed in detail herein, the Commission believes that it is
necessary to amend the original Rule to ensure that the Telemarketing
Act's goals are met--that is, encouraging the growth of the legitimate
telemarketing industry, while curtailing those practices that are
abusive or deceptive. The record in this rulemaking proceeding
demonstrates that many of the changes in the marketplace that have
occurred since the original Rule was promulgated have led to the growth
of deceptive and abusive practices in areas not adequately addressed by
the original Rule. The amended Rule addresses these practices by
responding to the changes in the marketplace in a manner consistent
with the intent of Congress in enacting the Telemarketing Act and Sec.
1011 of the USA PATRIOT Act. The Commission believes that the amended
Rule strikes a balance, maximizing consumer protections without
imposing unnecessary burdens on the telemarketing industry. Each of the
amendments is discussed in detail in this SBP. A summary of the major
changes from the original Rule is set forth below. The amended Rule:
[sbull] Supplements the current company-specific ``do-not-call''
provision with a provision that will empower a consumer to stop calls
from all companies within the FTC's jurisdiction by placing his or her
telephone number on a central ``do-not-call'' registry maintained by
the FTC, except when the consumer has an ``established business
relationship'' with the seller on whose behalf the call is made;
[sbull] Permits consumers who have put their numbers on the
national ``do-not-call'' registry to provide permission to call to any
specific seller by an express written agreement;
[sbull] Explicitly exempts solicitations to induce charitable
contributions via outbound telephone calls from coverage under the
national ``do-not-call'' registry provision;
[sbull] Modifies Sec. 310.3(a)(3) to require express verifiable
authorization for all transactions except when the method of payment
used is a credit card subject to protections of the Truth in Lending
Act and Regulation Z, or a debit card subject to the protections of the
Electronic Fund Transfer Act and Regulation E;
[sbull] Modifies Sec. 310.3(a)(3)(iii), the provision allowing a
telemarketer to obtain express verifiable authorization by sending
written confirmation of the transaction to the consumer prior to
submitting the consumer's billing information for payment;
[sbull] Mandates disclosures in the sale of credit card loss
protection, and prohibits misrepresenting that a consumer needs offered
goods or services in order to receive protections he or she already has
under 15 U.S.C. Sec. 1643 (limiting a cardholder's liability for
unauthorized charges on a credit card account);
[sbull] Explicitly mandates that all required disclosures in Sec.
310.3(a)(1) and Sec. 310.4(d) be made truthfully;
[sbull] Expands upon the current prize promotion disclosures to
include a statement that any purchase or payment will not increase a
consumer's chances of winning;
[sbull] Prohibits disclosing or receiving, for consideration,
unencrypted consumer account numbers for use in telemarketing, except
when the disclosure or receipt is to process a payment for goods or
services or a charitable contribution pursuant to a transaction;
[sbull] Prohibits causing billing information to be submitted for
payment, directly or indirectly, without the express informed consent
of the customer or donor;
[sbull] Sets out guidelines for what evidences express informed
consent in transactions involving preacquired account information and
``free-to-pay conversion'' features;
[sbull] Requires telemarketers to transmit the telephone number,
and name, when available, of the telemarketer to any caller
identification service;
[sbull] Prohibits telemarketers from abandoning any outbound
telephone call, and provides, in a safe harbor provision, that to avoid
liability under this provision, a telemarketer must: abandon no more
than three percent of all calls answered by a person; allow the
telephone to ring for fifteen seconds or four rings; whenever a sales
representative is unavailable within two seconds of a person's
answering the call, play a recorded message stating the name and
telephone number of the seller on whose behalf the call was placed; and
maintain records documenting compliance;
[sbull] Extends the applicability of most provisions of the Rule to
``upselling'' transactions;
[sbull] Prohibits denying or interfering in any way with a
consumer's right to be placed on a ``do-not-call'' list;
[sbull] Requires maintenance of records of express informed consent
and express agreement;
[sbull] Narrows certain exemptions of the Rule;
[sbull] Clarifies that facsimile transmissions, electronic mail,
and other similar methods of delivery are direct mail for purposes of
the direct mail exemption; and
[sbull] Modifies various provisions throughout the Rule to
effectuate expansion of the Rule's coverage to include charitable
solicitations, pursuant to Section 1011 of the USA PATRIOT Act, and
adds new mandatory disclosures and prohibited misrepresentations in
charitable solicitations.
[[Page 4584]]
G. Proposed Rule Adopted with Some Modifications.
Based on the entire record in this proceeding, the amended Rule
adopted by the Commission is substantially similar to the proposed
Rule. However, the amended Rule contains some important differences
from the proposed Rule. These further modifications to the original
Rule were based on the recommendations of commenters and on the
Commission's more comprehensive law enforcement experience in certain
areas over the months since publishing the NPRM.
The major differences between the proposed Rule and the amended
Rule adopted here are as follows:
[sbull] The definition of ``charitable contribution'' no longer
contains exceptions for religious and political groups;
[sbull] Sellers who have an ``established business relationship''
with the consumer are exempted from the national ``do-not-call''
registry;
[sbull] For-profit telemarketers who solicit charitable
contributions are exempted from the national ``do-not-call'' registry,
but remain subject to the entity-specific ``do-not-call'' provision;
[sbull] The original Rule's definition of ``outbound call'' has
been reinstated, and the proposed Rule modified to require specific
disclosures in an upsell transaction;
[sbull] Disclosures regarding negative option features are
required;
[sbull] Express verifiable authorization is required for all
payments, except those made by a credit or debit card subject to
certain statutorily-mandated consumer protections;
[sbull] For express oral authorization to be deemed verifiable, a
seller must ensure the customer's or donor's receipt of the date the
charge will be submitted for payment (rather than the date of the
payment) and identify the account to be charged with sufficient
specificity such that the customer or donor understands what account is
being used to collect payment (rather than provide the account name and
number);
[sbull] The use of written post-sale confirmations is permitted,
subject to the requirement that such confirmations be clearly and
conspicuously labeled as such; however, this method is not permitted in
transactions involving a ``free-to-pay conversion'' feature and
preacquired account information;
[sbull] In charitable solicitations, the prohibited
misrepresentation regarding the percentage or amount of any charitable
contribution that will go to a charitable organization or program is no
longer delimited by the phrase ``after any administrative or
fundraising expenses are deducted;''
[sbull] The Rule now specifies that billing charges to a consumer's
account without the consumer's authorization is an abusive practice and
a Rule violation; and the Rule now requires that a customer's express
informed consent be provided in every transaction;
[sbull] The ban on the transfer of consumers' billing information
has been replaced with a ban on transferring unencrypted consumer
account numbers;
[sbull] The failure to transmit caller identification information
is prohibited, rather than the affirmative blocking of such
information;
[sbull] Abandoned calls are prohibited, subject to a ``safe
harbor'' that requires a telemarketer to: abandon no more than three
percent of all calls answered by a person; allow the telephone to ring
for fifteen seconds or four rings; whenever a sales representative is
unavailable within two seconds of a person's answering the call, play a
recorded message stating the name and telephone number of the seller on
whose behalf the call was placed; and maintain records documenting
compliance;
[sbull] Records of express informed consent or express agreement
must be maintained;
[sbull] The exemptions for certain kinds of calls are explicitly
unavailable to upselling transactions;
[sbull] The exemption for business-to-business telemarketing is
once again available to telemarketing of Web services and Internet
services, as well as the solicitation of charitable contributions.
II. Discussion of the Amended Rule
The amendments to the Rule do not alter Sec. 310.7 (Actions by
States and Private Persons), or Sec. 310.8 (Severability), although
Sec. 310.8 (Severability) has been renumbered as Sec. 310.9 in the
amended Rule. Section 310.8 of the amended Rule is now reserved.
A. Section 310.1 -- Scope of Regulations.
Section 310.1 of the amended Rule states that ``this part [of the
CFR] implements the [Telemarketing Act], as amended,'' reflecting the
amendment of the Telemarketing Act by Sec. 1011 of the USA PATRIOT
Act.\40\ This section discusses comments received regarding the
implementation of the USA PATRIOT Act amendments as well as other
issues relating to the scope of coverage of the TSR.
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\40\ 15 U.S.C. 6101-6108. The Telemarketing Act was amended by
the USA PATRIOT Act on October 25, 2001. Pub. L. 107-56 (Oct. 26,
2001).
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Effect of the USA PATRIOT Act.
As noted in the NPRM, Sec. 1011(b)(3) of the USA PATRIOT Act
amends the definition of ``telemarketing'' that appears in the
Telemarketing Act, 15 U.S.C. Sec. 6306(4), by inserting the
underscored language:
The term `telemarketing' means a plan, program, or campaign which is
conducted to induce purchases of goods or services or a charitable
contribution, donation, or gift of money or any other thing of
value, by use of one or more telephones and which involves more than
one interstate telephone call. . . .
In addition, Sec. 1011(b)(2) adds a new section to the Telemarketing
Act requiring the Commission to include in the ``abusive telemarketing
acts or practices'' provisions of the TSR:
a requirement that any person engaged in telemarketing for the
solicitation of charitable contributions, donations, or gifts of
money or any other thing of value, shall promptly and clearly
disclose to the person receiving the call that the purpose of the
call is to solicit charitable contributions, donations, or gifts,
and make such other disclosures as the Commission considers
appropriate, including the name and mailing address of the
charitable organization on behalf of which the solicitation is made.
Finally, Sec. 1011(b)(1) amends the ``deceptive telemarketing acts or
practices'' provision of the Telemarketing Act, 15 U.S.C. Sec.
6102(a)(2), by inserting the underscored language:
The Commission shall include in such rules respecting deceptive
telemarketing acts or practices a definition of deceptive
telemarketing acts or practices which shall include fraudulent
charitable solicitations and which may include acts or practices of
entities or individuals that assist or facilitate deceptive
telemarketing, including credit card laundering.
Notwithstanding the amendment of these provisions of the
Telemarketing Act, neither the text of Sec. 1011 nor its legislative
history suggests that it amends Sec. 6105(a) of the Telemarketing
Act--the provision which incorporates the jurisdictional limitations of
the FTC Act into the Telemarketing Act and, accordingly, the TSR.
Section 6105(a) of the Act states:
Except as otherwise provided in sections 6102(d) [with respect to
the Securities and Exchange Commission], 6102(e) [Commodity Futures
Trading Commission], 6103 [state Attorney General actions], and 6104
[private consumer actions] of this title, this chapter shall be
enforced by the Commission under the Federal Trade Commission Act
(15 U.S.C. Sec. 41 et seq.). Consequently, no activity which is
outside of the jurisdiction of that Act shall
[[Page 4585]]
be affected by this chapter. (emphasis added).\41\
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\41\ Section 6105(b) reinforces the point made in Sec. 6105(a),
as follows:
``The Commission shall prevent any person from violating a rule
of the Commission under section 6102 of this title in the same
manner, by the same means, and with the same jurisdiction, powers,
and duties as though all applicable terms and provisions of the
Federal Trade Commission Act (15 U.S.C. Sec. 41 et seq.) were
incorporated into and made a part of this chapter. Any person who
violates such rule shall be subject to the penalties and entitled to
the same privileges and immunities provided in the Federal Trade
Commission Act in the same manner, by the same means, and with the
same jurisdiction, power, and duties as though all applicable terms
and provisions of the Federal Trade Commission Act were incorporated
into and made a part of this chapter.'' (emphasis added).
One type of ``activity which is outside the jurisdiction'' of the
FTC Act, as interpreted by the Commission and federal court decisions,
is that conducted by non-profit entities. Sections 4 and 5 of the FTC
Act, by their terms, provide the Commission with jurisdiction only over
persons, partnerships, or ``corporations organized to carry on business
for their own profit or that of their members.''\42\
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\42\ Section 5(a)(2) of the FTC Act states: ``The Commission is
hereby empowered and directed to prevent persons, partnerships, or
corporations . . . from using unfair or deceptive acts or practices
in or affecting commerce.'' 15 U.S.C. 45(a)(2). Section 4 of the Act
defines ``corporation'' to include: ``any company, trust, so-called
Massachusetts trust, or association, incorporated or unincorporated,
which is organized to carry on business for its own profit or that
of its members . . . .'' 15 U.S.C. 44 (emphasis added).
---------------------------------------------------------------------------
Reading the amendments to the Telemarketing Act effectuated by
Sec. 1011 of the USA PATRIOT Act together with the unchanged sections
of the Telemarketing Act compels the conclusion that for-profit
entities that solicit charitable donations now must comply with the
TSR, although the Rule's applicability to charitable organizations
themselves is unaffected.\43\ The USA PATRIOT Act brings the
Telemarketing Act's jurisdiction over charitable solicitations in line
with the jurisdiction of the Commission under the FTC Act by expanding
the Rule's coverage to include not only the sale of goods or services,
but also charitable solicitations by for-profit entities on behalf of
nonprofit organizations.
---------------------------------------------------------------------------
\43\ A fundamental tenet of statutory construction is that ``a
statute should be read as a whole, . . . [and that] provisions
introduced by the amendatory act should be read together with the
provisions of the original section that were . . . left unchanged .
. . as if they had been originally enacted as one section.'' 1A
NORMAN J. SINGER, SUTHERLAND STATUTES & STAT. CONSTR. Sec. 22:34
(6th ed. 2002), citing, inter alia, Brothers v. First Leasing, 724
F.2d 789 (9th Cir. 1984); Republic Steel Corp. v. Costle, 581 F.2d
1228 (6th Cir. 1978); Am. Airlines, Inc. v. Remis Indus., Inc., 494
F.2d 196 (2d Cir. 1974); Kirchner v. Kansas Tpk. Auth., 336 F.2d 222
(10th Cir. 1964); Nat'l Ctr. for Preservation Law v. Landrieu, 496
F. Supp. 716 (D.S.C. 1980); Conoco, Inc. v. Hodel, 626 F. Supp. 287
(D. Del. 1986); Palardy v. Horner, 711 F. Supp. 667 (D. Mass. 1989).
Thus, in construing a statute and its amendments, ``[e]ffect is to
be given to each part, and they are to be int erpreted so that they
do not conflict.'' Id.
---------------------------------------------------------------------------
The Commission received numerous comments regarding the change in
scope to the TSR required by the USA PATRIOT Act amendments of the
Telemarketing Act. Some comments supported the Commission's
interpretation of the USA PATRIOT Act amendments, and the coverage of
for-profit telemarketers who solicit on behalf of exempt charitable
organizations.\44\ However, the majority of commenters who addressed
this issue believed the Commission had misinterpreted the mandate of
the USA PATRIOT Act amendments. Law enforcement agencies and consumer
groups, including NAAG and NASCO, generally expressed the view that the
Commission had underestimated the jurisdictional powers conferred on it
by the USA PATRIOT Act amendments, and urged that the Rule apply not
only to for-profit solicitors who call on behalf of charities, but also
to the charities themselves.\45\ These commenters argued that the
language of the USA PATRIOT Act and its legislative history do not
support limiting the applicability of the TSR to telemarketers who call
on behalf of non-profits, rather than extending it to cover charitable
organizations as well.\46\
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\44\ See, e.g., AARP-NPRM at 4; AFP-NPRM at 3 (arguing that the
USA PATRIOT Act gives the FTC jurisdiction over for-profit
telemarketers soliciting on behalf of non-profits, agreeing that the
disclosures required by amended Rule Sec. 310.4(e) are necessary,
and noting that the disclosures mirror the disclosures required by
AFP's code of ethics); ASTA-NPRM at 1; Make-a-Wish-NPRM, passim;
MBNA-NPRM at 6 (the Rule amendments to effectuate the USA PATRIOT
Act's provisions ``reflect Congress' intent and are limited in scope
and impact while providing important consumer benefits.'').
\45\ See, e.g., NAAG-NPRM at 50-51; NASCO-NPRM at 3-4.
\46\ See NAAG-NPRM at 50-51; NASCO-NPRM at 3-4 (the USA PATRIOT
Act refers to ``fraudulent charitable solicitations,'' and requires
disclosures by ``any person'' engaged in telemarketing; also noting
that the USA PATRIOT Act was passed in the wake of September 11,
2001, and in response to misrepresentations by non-profits as well
as their for-profit telemarketers.).
---------------------------------------------------------------------------
On the other hand, most non-profit organizations that commented
argued that the Commission's interpretation of the USA PATRIOT Act
amendments was too expansive. Several of these commenters argued that
in adopting Sec. 1011 of the USA PATRIOT Act, ``Congress meant only to
apply certain disclosure requirements--and not the other aspects of the
Rule--to professional fundraisers for charities and to for-profit
entities soliciting charitable contributions for their own
philanthropic purposes.''\47\ Others suggested that ``Congress intended
only to address bogus charitable solicitation where the non-profit or
charitable cause or organizational scheme itself is of a criminal or
fraudulent nature.''\48\ These commenters cite statements made by the
legislation's chief sponsor to the effect that concerns about
fraudulent charities prompted him to introduce the legislation.\49\
---------------------------------------------------------------------------
\47\ DMA-NonProfit-NPRM at 4. See also ACE-NPRM at 1-2; ERA-NPRM
at 45; IUPA-NPRM at 21-22.
\48\ Not-For-Profit Coalition-NPRM at 26. See also Community
Safety-NPRM at 2.
\49\ See Not-For-Profit Coalition-NPRM at 27-28; DMA-NonProfit-
NPRM at 5.
---------------------------------------------------------------------------
The Commission believes that concerns about bogus charitable
fundraising in the wake of the events of September 11, 2001, in large
measure propelled passage of Sec. 1011 of the USA PATRIOT Act.\50\ But
the fact remains that Congress did more than impose upon the
solicitation of charitable contributions by for-profit telemarketers
prohibitions against misrepresentation and basic disclosure
obligations. Indeed, the USA PATRIOT Act amendments alter the scope of
the entire TSR by altering the key definition of the statute--
``telemarketing''--to encompass charitable solicitation. Moreover, the
text of Sec. 1011 expressly directs the Commission to address both
deceptive and abusive acts or practices.\51\ Thus, there is no textual
support for the notion that Sec. 1011 excludes from its grant of
authority over charitable solicitations the power to prohibit deceptive
or abusive practices.\52\
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\50\ See letter dated June 14, 2002, from Senator Mitch
McConnell to FTC Chairman Timothy Muris, commenting on the NPRM and
stating:
``In an effort to protect generous citizens and the charitable
institutions they support, I was proud to introduce the Crimes
Against Charitable Americans Act and secure its inclusion in the USA
PATRIOT Act. This legislation strengthens federal laws regulating
charitable phone solicitations. The bill also takes important steps
to combat deceptive charitable solicitations by requiring
telemarketers to make common sense disclosures such as the charity's
identity and address at the beginning of the phone call. . . . When
Congress enacted this legislation, it did not envision, nor did it
call for, the FTC to propose a federal ``do-not-call'' list, and
certainly not a list that applied to charitable organizations or
their authorized agents.''
\51\ Pub. L. 107-56 (Oct. 26, 2001).
\52\ It is a tenet of statutory construction that ``an
amendatory act is not to be construed to change the original act . .
. further than expressly declared or necessarily implied.''
SUTHERLAND STAT. CONSTR., note 43 above, at Sec. 22:30 (citations
omitted). The Commission believes the necessary implication of
modifying the definition of ``telemarketing'' in the USA PATRIOT Act
is to have all provisions of the Rule apply to charitable
solicitations.
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[[Page 4586]]
Some non-profit commenters also argued that the Commission's
interpretation of the USA PATRIOT Act produced, in effect, a double
standard, regulating charities who outsource their telemarketing, but
not those who conduct their own telemarketing campaigns.\53\ Others
opined that this bifurcated regulatory scheme was not intended by
Congress when it passed the USA PATRIOT Act amendments to the
Telemarketing Act.\54\ These commenters argued that this distinction
penalizes charities (by subjecting them to regulation) merely because
they choose to outsource an administrative function. Some argued
further that the increased costs of regulatory compliance will not be
borne by the for-profit telemarketers, but rather by charities
themselves, negatively impacting their ability to carry out their
primary mission.\55\
---------------------------------------------------------------------------
\53\ See, e.g., March of Dimes-NPRM at 2.
\54\ See IUPA-NPRM at 1.
\55\ See Reese-NPRM at 2.
---------------------------------------------------------------------------
Again, the Commission notes that despite its broad mandate to
regulate charitable solicitations made via telemarketing, the USA
PATRIOT Act amendments did not expand the Commission's jurisdiction
under the TSR to make direct regulation of non-profit organizations
possible. Nevertheless, reading the amendatory act together with the
original language, as it must, the Commission has sought to give full
effect to the directive of Congress set forth in the USA PATRIOT Act
amendments.
Another argument raised by large numbers of non-profit commenters
is that regulating for-profit telemarketers who solicit on behalf of
non-profits, and in particular subjecting them to the requirements of
the ``do-not-call'' registry provision, is unfair given the other
limitations on the Commission's jurisdiction.\56\ These commenters
suggested that the result of this scheme would be to allow commercial
calls that consumers find intrusive, while banning calls from
charities, even those with whom a donor has a past relationship.\57\ As
explained in greater detail in the discussion of the applicability of
the ``do-not-call'' provisions to charitable solicitation
telemarketing, careful consideration of this argument has led the
Commission to exempt solicitations to induce charitable contributions
via outbound telephone calls from the ``do-not-call'' registry
provision. Only the less restrictive entity-specific ``do-not-call''
provision included in the original Rule will apply to charitable
solicitation telemarketing. However, both the entity-specific ``do-not-
call'' provisions and the ``do-not-call'' registry provisions apply to
commercial telemarketing to induce purchases of goods or services. This
approach fulfills the Commission's intention that the TSR be consistent
with First Amendment principles, whereby a higher degree of protection
is extended to charitable solicitation than to commercial solicitation.
Moreover, as a practical matter, the Commission believes that this
approach will enable charities to continue soliciting support and
pursuing their missions.
---------------------------------------------------------------------------
\56\ See, e.g., FOP-NPRM at 2; HRC-NPRM at 1; Italian American
Police-NPRM at 1; Lautman-NPRM at 2; Leukemia Society-NPRM at 1-2;
NCLF-NPRM at 1; Angel Food-NPRM at 1; North Carolina FFA-NPRM at 1;
SO-CT-NPRM at 1; SO-NJ-NPRM at 1; SO-WA-NPRM at 1; Reese-NPRM at 2;
SHARE-NPRM at 3; Stage Door-NPRM at 1.
\57\ See, e.g., PAF-NPRM at 1; AOP-Supp. at 1; Chesapeake-Supp.
at 1.
---------------------------------------------------------------------------
Commenters' Proposals.
Noting the Commission's jurisdictional limitations with respect to
banks, MBNA requested that the Rule explicitly state that it is
``inapplicable to entities exempt from coverage under Sec. 5(a)(2) of
the [FTC Act].''\58\ MBNA also recommended that the Rule extend this
exemption to ``entities acting on behalf of banks . . . because such
entities are regulated by the Bank Service Company Act, 15 U.S.C. Sec.
45(a)(2), concerning services they provide for banks.''\59\ MasterCard
challenged the Commission's statement that it can regulate third-party
telemarketers who call on behalf of a bank, and urged that the
Commission explicitly exempt ``any bank subsidiary or affiliate
performing services on behalf of a bank.\60\ ABA recommended that the
amended Rule clarify that ``non-bank operating subsidiaries of banks as
defined by the banking agencies'' are exempt.\61\
---------------------------------------------------------------------------
\58\ MBNA-NPRM at 2. Accord Fleet-NPRM at 2 (arguing that the
Office of the Comptroller of the Currency already provides
significant guidance to banks on managing risks that may arise from
their business relationships with third parties); AFSA-NPRM at 3.
\59\ MBNA-NPRM at 2. See also AFSA-NPRM at 3.
\60\ MasterCard-NPRM at 13-14. Accord Citigroup-NPRM at 11.
\61\ ABA-NPRM at 3.
---------------------------------------------------------------------------
The Commission notes that, from the inception of the Rule, the
Commission has asserted that parties acting on behalf of exempt
organizations are not thereby exempt from the FTC Act, and thus, for
example, ``a nonbank company that contracts with a bank to provide
telemarketing services on behalf of the bank is covered'' by this
Rule.\62\ This reading is consistent with the Commission's long-
standing interpretation of the scope of its authority under the FTC
Act, as well as with judicial precedent.\63\ Furthermore, the
Commission's authority was clarified in Sec. 133 of the Gramm-Leach-
Bliley Act (``GLBA''), which states that ``[a]ny person that . . . is
controlled directly or indirectly . . . by . . . any bank . . . ([as]
defined in section 3 of the Federal Deposit Insurance Act) and is not
itself a bank . . . shall not be deemed to be a bank . . . for purposes
of any provisions applied by'' the FTC under the FTC Act.\64\ Most
recently, a federal district court held that, under this language, the
Rule applies to telemarketing by a mortgage subsidiary of a national
bank. As the court stated, ``the definition of `bank' identified by
Congress simply does not include the subsidiaries of banks.''\65\
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\62\ 60 FR at 43843, citing, inter alia, Official Airline Guides
v. FTC, 630 F.2d 920 (2d Cir. 1980) (holding that the air carrier
exemption from the FTC Act did not apply to a firm publishing
schedules and fares for air carriers, which was not itself an air
carrier); FTC/Direct Mktg. Ass'n., Complying with the Telemarketing
Sales Rule (Apr. 1996) (``TSR Compliance Guide'') at 7.
\63\ See, e.g., Official Airline Guides, note 62 above; FTC v.
Saja, 1997-2 CCH (Trade Cas.) P 71,952 (D. Ariz. 1997); FTC v. Am.
Standard Credit Sys., Inc., 874 F. Supp. 1080 (1994).
\64\ GLBA, Pub. L. 106-102, 113 Stat. 1383, Title I, Sec.
133(a), 15 U.S.C. 6801-6810 (2001).
\65\ Minnesota v. Fleet Mortgage Corp., 181 F. Supp. 2d 995 (D.
Minn. 2001) (noting that the applicable definition under the Federal
Deposit Insurance Act (``FDIA'') is ``any national bank, State bank,
District Bank, and any Federal branch and insured branch'' citing
FDIA, 12 U.S.C. 1813(a)(1)(A)).
---------------------------------------------------------------------------
The Commission believes it is unnecessary to state in the Rule what
is already plain in the Telemarketing Act, i.e., that its jurisdiction
for purposes of the TSR is conterminous with its jurisdiction under the
FTC Act, and therefore declines to include an express statement of this
fact in the Rule. Further, the Commission declines to adopt the
interpretation of some commenters that the FTC Act itself exempts non-
bank entities based on their affiliation with or provision of services
to exempt banks, and the recommendations of those commenters who sought
an exemption from the Rule for bank subsidiaries or agents. To do so
would be contrary to the Commission's interpretation of its
jurisdictional boundaries, and would unnecessarily limit the reach of
the Rule.\66\
---------------------------------------------------------------------------
\66\ This approach is consistent with that laid out in the SBP
of the original Rule. See 60 FR at 43483.
---------------------------------------------------------------------------
In a similar argument, SBC asserted that, contrary to the
Commission's stated position, the Commission's lack of jurisdiction
over common carriers engaged in common carriage activity extends to
their affiliates and their agents engaged in telemarketing on their
behalf.\67\ SBC cites no authority for this proposition, and the
Commission is
[[Page 4587]]
aware of none. SBC claims that the cases cited by the Commission in the
NPRM\68\ in support of its authority provide no support for Commission
jurisdiction over a common carrier's agent assisting in selling common
carrier services.\69\ In fact, in one of those cases, the publisher of
what the court described as ``the primary market tool of . . .
virtually every (air) carrier . . . in the United States'' was held not
to be exempt under the exemption for air carriers.\70\ Accordingly, the
Commission declines to revise its position.
---------------------------------------------------------------------------
\67\ SBC-NPRM at 2, 4-5.
\68\ 67 FR at 4407 (citing 60 FR at 43843, citing FTC v. Miller,
549 F.2d 452 (7th Cir. 1977) and Official Airline Guides), see note
62 above.
\69\ SBC-NPRM at 4-5.
\70\ Official Airline Guides, see note 62 above. See also cases
cited above in note 63, rejecting exemption claims of telemarketers
for exempt organizations.
---------------------------------------------------------------------------
Citigroup requested that the amended Rule clarify that certain
financial services providers, such as insurance underwriters and
registered broker-dealers, are exempt from the Rule.\71\ NAIFA
requested similar clarification regarding insurance companies, as well
as an explicit statement of exemption in the Rule.\72\ The Commission
believes that the explicit statement of the Commission's jurisdictional
limitation over broker-dealers is abundantly clear in the Telemarketing
Act itself;\73\ thus, it is unnecessary to exempt them in the Rule.
Similarly, the Commission believes its jurisdictional limitations
regarding the business of insurance are clear, and thus no express
exemption for these entities is necessary.\74\
---------------------------------------------------------------------------
\71\ See Citigroup-NPRM at 10.
\72\ See NAIFA-NPRM at 1-2.
\73\ 15 U.S.C. 6102(d)(2).
\74\ See Section 2 of the McCarran-Ferguson Act, 15 U.S.C.
1012(b) (the business of insurance, to the extent that it is
regulated by state law, is exempt from the Commission's jurisdiction
pursuant to the FTC Act).
---------------------------------------------------------------------------
In contrast to these requests to circumscribe or restate the
Commission's jurisdiction under the Rule, a number of commenters urged
the expansion of the Rule's scope beyond its current boundaries. As NCL
put it, ``[b]ecause the Commission's general jurisdiction does not
include significant segments of the telemarketing industry, such as
common carriers and financial institutions, the Rule does not provide
comprehensive protection for consumers or a level playing field for
marketers.''\75\ Others argued that the Commission should assert
jurisdiction over intrastate calls as well as interstate calls.\76\
---------------------------------------------------------------------------
\75\ NCL-NPRM at 2. See also Horick-NPRM at 1; PRC-NPRM at 3-4;
Myrick-NPRM at 1.
\76\ FCA-NPRM at 2.
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As the Commission stated in the NPRM, ``the jurisdictional reach of
the Rule is set by statute, and the Commission has no authority to
expand the Rule beyond those statutory limits.''\77\ Thus, absent
amendments to the FTC Act or the Telemarketing Act, the Commission is
limited with regard to its ability to regulate under the Rule those
entities explicitly exempt from the FTC Act. Despite this limitation,
the Commission can reach telemarketing activity conducted by non-exempt
entities on behalf of exempt entities.\78\ Therefore, when an exempt
financial institution, telephone company, or non-profit entity conducts
its telemarketing campaign using a third-party telemarketer not exempt
from the Rule, then that campaign is subject to the provisions of the
TSR.\79\
---------------------------------------------------------------------------
\77\ 67 FR at 4497.
\78\ Id.
\79\ As the Commission stated when it promulgated the Rule,
``[t]he Final Rule does not include special provisions regarding
exemptions of parties acting on behalf of exempt organizations;
where such a company would be subject to the FTC Act, it would be
subject to the Final Rule as well.'' 60 FR at 43843. Although some
commenters, such as SBC (SBC-NPRM at 5-8) and Wells Fargo (Wells
Fargo-NPRM at 2), took issue with this proposition, the fact remains
that the Telemarketing Act states merely that ``no activity which is
outside the jurisdiction of that Act shall be affected by this
chapter.'' 15 U.S.C. 6105(a). Thus, when an entity not exempt from
the FTC Act engages in telemarketing, that conduct falls within the
Commission's jurisdiction under the TSR. Id.; TSR Compliance Guide
at 12.
---------------------------------------------------------------------------
Regarding the suggestion that the Commission regulate intrastate
telemarketing calls, the Commission notes that, pursuant to the
definition of ``telemarketing'' included in the Telemarketing Act, 15
U.S.C. Sec. 6106(4), the Commission only has authority to regulate ``a
plan, program, or campaign which is conducted . . . by use of one or
more telephones and which involves more than one interstate call.''
(emphasis added).
Finally, one commenter suggested that the Commission expressly
state its jurisdiction over prerecorded telephone solicitations and
facsimile advertisements.\80\ The Commission believes that sales calls
using pre-recorded messages may fall within the Rule's definition of
``telemarketing,'' provided the call is not exempt and provided the
call meets the other criteria of ``telemarketing.'' Thus, a sales call
using a prerecorded message may be ``telemarketing'' if it is part of a
plan, program, or campaign for the purpose of inducing the purchase of
goods or services or inducing a donation to a charitable organization,
is conducted by use of one or more telephones, and involves more than
one interstate call. However, the fact that prerecorded sales calls may
be ``telemarketing'' does not affect the fact that such calls are
already prohibited, except with the consumer's prior express consent,
under regulations promulgated by the FCC pursuant to the TCPA.\81\
Similarly, FCC regulations already prohibit unsolicited facsimile
advertisements,\82\ although facsimiles also are a form of direct mail
subject to the TSR. The Commission notes in the discussion of Sec.
310.6(b)(6) below that it considers facsimiles to be a form of direct
mail solicitation. Thus, under Sec. 310.6(b)(6), a seller using a
facsimile advertisement to induce calls from consumers may not claim
the direct mail exemption unless the facsimile truthfully discloses the
material information listed in Sec. 310.3(a)(1) (or contains no
material misrepresentation regarding any item contained in Sec.
310.3(d) if the solicitation is for a charitable contribution).
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\80\ See Worsham-NPRM at 6.
\81\ 47 CFR 64.1200(a)(2).
\82\ 47 CFR 64.1200(a)(3).
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B. Section 310.2 -- Definitions.
The amended Rule retains the following definitions from the
original Rule unchanged, apart from renumbering: ``acquirer,''
``Attorney General,'' ``cardholder,'' ``Commission,'' ``credit,''
``credit card,'' ``credit card sales draft,'' ``credit card system,''
``customer,''\83\ ``investment opportunity,''\84\ ``merchant,''
``merchant agreement,'' ``person,'' ``prize,'' ``prize promotion,''
``seller,'' and ``State.''
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\83\ VISA stated that the definition of ``customer'' is too
broad, encompassing not only ``the person who is party to the
telemarketing call and who would be liable for the amount of a
purchase as the contracting party, but also would include any person
who is liable under the terms of the payment device.'' VISA-NPRM at
7. Although the term ``customer,'' defined to mean ``any person who
is or may be required to pay for goods or services offered through
telemarketing,'' is broad in scope, the Commission believes this
breadth is necessary to effect the purposes of the Rule. Further,
the Commission believes that the term ``customer,'' taken in context
of the various Rule sections in which it is used, is not confusing.
Therefore, the Commission makes no change in the amended Rule to the
definition of ``customer.''
\84\ One commenter recommended that the Commission clarify that
an investment vehicle whose main attribute is that it provides tax
benefits would be considered an ``investment opportunity'' under the
Rule. Thayer-NPRM at 6. The Commission believes that such a tax-
advantaged investment would come under the present definition, which
is predicated on representations about ``past, present, or future
income, profit, or appreciation.'' The Commission believes that any
such investment opportunity would only result in a tax advantage
because of its ability to produce income or appreciation, regardless
of whether that income is positive (and tax-deferred or tax-exempt)
or negative (resulting in deductible losses). Thus, the Commission
has retained the original definition of ``investment opportunity''
in the amended Rule.
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Based on the record developed in this matter, the Commission has
determined to retain the following definitions from
[[Page 4588]]
the proposed Rule unchanged, apart from renumbering: ``caller
identification service,'' ``donor,'' ``telemarketer,''\85\ and
``telemarketing.'' The amended Rule modifies the definitions put forth
in the NPRM for the terms ``billing information,'' ``charitable
contribution,'' ``material,'' and ``outbound telephone call.'' Finally,
the amended Rule adds five definitions that were not included in the
NPRM proposal. They are: ``established business relationship,'' ``free-
to-pay conversion,'' ``negative option feature,'' ``preacquired account
information,'' and ``upselling.'' The Commission discusses each of
these definitions below, along with the comments received regarding
them, and the Commission's reasoning in making a final determination
regarding each of these definitions.\86\
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\85\ One commenter expressed concern that ``a company that sells
telemarketing services to sellers, but does not maintain any calling
facilities itself, instead subcontracting the actual telephoning to
individuals'' might not fall within the definition of
``telemarketer.'' Patrick-NPRM at 2. The Commission disagrees, and
believes that regardless of whether an entity maintains a physical
call center, it would be a ``telemarketer'' for purposes of the Rule
if ``in connection with telemarketing, [it] initiates or receives
telephone calls to or from a customer or donor.'' Amended Rule Sec.
310.2(bb).
\86\ The definitions proposed in the NPRM for ``express
verifiable authorization,'' ``Internet services,'' and ``Web
services'' have been deleted from the amended Rule because they are
no longer necessary in light of certain substantive modifications in
the amended Rule.
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Sec. 310.2(c) -- Billing information
The proposed Rule included a definition of the term ``billing
information,'' which was used in proposed Sec. 310.3(a)(3), the
express verifiable authorization provision, and proposed Sec.
310.4(a)(5), the section that addressed preacquired account
telemarketing. Under the definition proposed in the NPRM, the term
``billing information'' encompassed ``any data that provides access to
a consumer's or donor's account, such as a credit card, checking,
savings, or similar account, utility bill, mortgage loan account, or
debit card.''\87\
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\87\ See proposed Rule Sec. 310.2(c), and discussion, 67 FR at
4498-99.
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The Commission received numerous comments regarding this definition
as it pertained to the express verifiable authorization and preacquired
account provisions of the proposed Rule. The use of the term in the
express verifiable authorization provision drew less comment, perhaps
because that provision merely required that the customer or donor
receive such billing information if express verifiable authorization of
payment is to be deemed verifiable.\88\ Comments from consumer groups
generally favored the ``billing information'' definition, noting that
the breadth of the term would prove beneficial to consumers.\89\ AARP,
for example, stated that the definition, as employed in the proposed
preacquired account telemarketing provision, ``is broad enough so as
not to leave any doubt in the mind of the telemarketer regarding what
can and cannot be shared.''\90\ Law enforcement representatives and
some consumer groups expressed their concern that, as broad as the
definition might seem, it should be further expanded to encompass
encrypted data, and other kinds of information that can allow access to
a consumer's account.\91\ Industry commenters, on the other hand,
argued precisely the opposite, requesting that the definition be
narrowed and that it specifically exclude encrypted data,\92\ or other
specified items unique to that commenter's business practices.\93\
Instead, industry commenters recommended, ``billing information''
should be limited to account information that ``in and of itself, is
sufficient to effect a transaction'' against a consumer's account.\94\
Virtually all of these comments were made in the context of the
proposed Rule provision regarding preacquired account telemarketing,
which would have prohibited the disclosure or receipt of ``billing
information'' except when provided by the customer or donor to process
payment.
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\88\ As discussed below, in the section explaining the express
verifiable authorization provision (i.e., Sec. 310.3(a)(3)),
commenters' concerns regarding billing information in the express
verifiable authorization provision focused on the dangers of
disclosure of consumers' account numbers.
\89\ See NCLC-NPRM at 13; LSAP-NPRM at 5 (approved of
definition, but also suggested changing ``such as'' to ``including
but not limited to'').
\90\ AARP-NPRM at 7.
\91\ Specifically, NAAG noted: ``[T]he Gramm Leach Bliley Act
(``GLBA'') has resulted in the common use of reference numbers and
encrypted numbers to identify consumer accounts in preacquired
account telemarketing. These types of account access devices
definitely should be included in the list of examples. Failure to
include encrypted numbers within the scope of the Rule's definition
of `billing information' would render the Rule useless as a device
to combat the ills of preacquired account telemarketing.'' NAAG-NPRM
at 38. See also NACAA-NPRM at 5-6 (``consider providing a non-
exclusive list of such information, based upon technologies in place
today. Thus, name, account number, telephone number, married and
maiden names of parents, social security number, passwords to
accounts and PINs, and encrypted versions of this information, with
or without the encryption [key], should all be prohibited from use
in any trasaction but the immediate one in which the co nsumer is
engaged.''); NCLC-NPRM at 13.
\92\ Citigroup-NPRM at 7-8; Household Auto-NPRM at 2 (``Although
the specific language of the proposed definition does appear to be
consistent with the Commission's GLBA interpretation, the
explanation of the term in the [NPRM] is broader and creates a
conflict with the GLBA interpretation . . . . To avoid such a
conflict, we suggest that the Commission clarify that the term . . .
includes only account numbers and specifically excludes encrypted
account numbers.''). Accord ABIA-NPRM at 2; Roundtable-NPRM at 8
(``The Roundtable is concerned that this definition is so broad that
it could be construed to restrict the sharing of publicly available
identifying information, such as a consumer's name, phone number and
address.''). See also AFSA-NPRM at 11-12; Advanta-NPRM at 3; ARDA-
NPRM at 3; Assurant-NPRM at 3; Capital One-NPRM at 8-9; Cendant-NPRM
at 7; Citigroup-NPRM at 7; E-Commerce Coalition-NPRM at 2; ERA-NPRM
at 24; IBM-NPRM at 10; MPA-NPRM at 23, n.23; MasterCard-NPRM at 8;
Metris-NPRM at 7; VISA-NPRM at 6.
\93\ See, e.g., Green Mountain-NPRM at 31 (``If the Commission
intends to adopt its proposal to amend the TSR to add a new Section
310.4(a)(5) to ban the use of preacquired billing information
obtained from third parties, it should exempt names, addresses,
electricity meter identifiers, and electricity usage patterns from
its definition of `billing information.''')
\94\ IBM-NPRM at 10. ARDA argued that information that would
fall within the definition of ``billing information'' --such as a
customer's or donor's date of birth-- may be collected during a call
for purposes other than to effect a charge. ARDA cited examples
including ``eligibility to enter a contest or drawing'' or
``demographic purposes.'' ARDA-NPRM at 3. ARDA then asserted that,
while this information may not be gathered during a call in which a
billing occurs, or used for billing purposes in the first instance,
it could be passed along to other parties for marketing or other
purposes. Id. While the Commission recognizes that information like
date of birth has marketing uses beyond access to consumer accounts
for billing purposes, the Commission finds it improbable at best
that collection or confirmation of date of birth, or similar piece
of information, as a proxy for consent to be charged for a purchase
or donation would satisfy the ``express informed consent''
requirements of amended Rule Sec. 310.4(a)(6), discussed below.
---------------------------------------------------------------------------
As noted below in the discussions of amended Rule Sec. Sec.
310.4(a)(5) and (6), the Commission has tailored its approach to
preacquired account telemarketing, thereby addressing many of the
concerns raised by commenters on both sides regarding the proposed
definition of ``billing information.'' The amended Rule's approach to
preacquired account telemarketing--which no longer focuses on the
sharing of ``billing information'' in anticipation of telemarketing,
but instead prohibits ``[c]ausing billing information to be submitted
for payment, directly or indirectly, without the express informed
consent of the customer or donor''--obviates the concerns about the
breadth of the term, and whether it includes or excludes encrypted
account numbers.\95\ However,
[[Page 4589]]
the amended Rule includes a definition of ``preacquired account
information,'' which encompasses both encrypted and unencrypted account
information, to address specifically the practice of preacquired
account telemarketing.\96\
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\95\ During the Rule Review, industry argued the term was so
broad it might mean that sellers and telemarketers could not share
customer names and telephone numbers for use in telemarketing. See,
e.g., Advanta-NPRM at 3; Roundtable-NPRM at 8. Industry also argued
that encrypted data should not be included in the definition of
``billing information,'' because such data by itself does not allow
a charge to be placed on a consumer's account, and because sharing
it is permitted by the GLBA. See, e.g., Cendant-NPRM at 7; E-
Commerce Coalition-NPRM at 2; MPA at 23, n.23. These arguments have
been addressed by the Commission's revised approach to preacquired
account telemarketing, which focuses not on the sharing of account
information--except in the very limited area of sale of unencrypted
account numbers--but on the harm that results from certain practices
in preacquired account telemarketing, i.e., unauthorized charges.
Moreover, in those instances where there has been the strongest
history of abuse, sellers and telemarketers are required to obtain
part or all of the customer's account number directly from the
customer.
\96\ See amended Rule Sec. 310.2(w), and related discussion
below.
---------------------------------------------------------------------------
Consequently, after consideration of the record in this proceeding,
and in light of the more focused approach to the provisions in which
the term is used, the Commission has decided to retain the proposed
definition of ``billing information,'' with a minor modification. The
definition now encompasses ``any data that enables any person to obtain
access to a customer's or donor's account, such as a credit card,
checking, savings, share or similar account, utility bill, mortgage
loan account, or debit card.'' (emphasis added). The Commission
believes that this syntactical modification, substituting the phrase
``that enables any person to obtain access'' for the phrase ``that
provides access,'' makes the definition more precise and somewhat
easier to understand. The definition retains the broad scope of its
predecessor in order to capture the myriad ways a charge may be placed
against a consumer's account,\97\ yet has more limited effect in the
context of the approach adopted in the amended Rule to address
preacquired account telemarketing and express verifiable authorization.
---------------------------------------------------------------------------
\97\ The record shows that a telemarketer or seller may provide
anything from complete account number to mother's maiden name to
initiate a charge for a telemarketing transaction, depending on its
relationship with another seller, financial institution, or billing
entity. See, e.g., Assurant-NPRM at 4.
---------------------------------------------------------------------------
Sec. 310.2(d) -- Caller identification service
The definition of ``caller identification service'' comes into play
in Sec. 310.4(a)(7) of the amended Rule, discussed below. In the NPRM,
the Commission proposed to define ``caller identification service'' to
mean ``a service that allows a telephone subscriber to have the
telephone number, and, where available, name of the calling party
transmitted contemporaneously with the telephone call, and displayed on
a device in or connected to the subscriber's telephone.'' As the
Commission explained in the NPRM, the Commission intends the definition
of ``caller identification service'' to be sufficiently broad to
encompass any existing or emerging technology that provides for the
transmission of calling party information during the course of a
telephone call.\98\ Those few commenters who addressed the definition
supported the Commission's proposal.\99\ Therefore, the amended Rule
adopts Sec. 310.2(d), the definition of ``caller identification
service,'' unchanged from the proposal.
---------------------------------------------------------------------------
\98\ 67 FR at 4499.
\99\ See, e.g., EPIC-NPRM at 11; ARDA-NPRM at 4. ARDA suggested
that the definition be expanded to allow transmission of the name
and number of ``any party whom the telephone subscriber may
contact'' regarding being placed on the company's ``do-not-call''
list. As noted in the subsequent discussion of this provision, Sec.
310.4(a)(7) of the amended Rule permits telemarketers to substitute
a customer service number on the caller identification transmission.
---------------------------------------------------------------------------
Sec. 310.2(e) -- Charitable contribution
The original Rule did not include a definition of ``charitable
contribution'' because originally the term ``telemarketing'' in the
Telemarketing Act, which determined the scope of the TSR, was defined
to reach telephone solicitations only for the purpose of inducing sales
of goods or services.\100\ The proposed Rule added a definition of the
term ``charitable contribution'' because Sec. 1011 of the USA PATRIOT
Act amended the Telemarketing Act to specify that ``telemarketing'' now
includes not only calls to induce purchases of goods or services but
also calls to induce ``a charitable contribution, donation, or gift of
money or any other thing of value.''\101\ The Commission has determined
that the term ``charitable contribution,'' defined for the purposes of
the Rule to mean ``any donation or gift of money or any other thing of
value'' succinctly captures the meaning intended by Congress.
Therefore, the Commission has retained this definition from the
proposed Rule. It has, however, determined to modify the proposed
definition to eliminate the exemptions included in the proposed Rule.
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\100\ 15 U.S.C. 6106(4).
\101\ 15 U.S.C. 6106(4) (amended by Sec. 1011(b)(3) of the USA
PATRIOT Act, Pub. L. 107-56 (Oct. 26, 2001)).
---------------------------------------------------------------------------
The proposed definition in the NPRM expressly excluded donations or
gifts of money or any other thing of value solicited by or on behalf of
``political clubs, committees, or parties, or constituted religious
organizations or groups affiliated with and forming an integral part of
the organization where no part of the net income inures to the direct
benefit of any individual, and which has received a declaration of
current tax exempt status from the United States government.''\102\
This proposed exemption drew strong comment and criticism. NASCO
recommended that a definition of ``constituted religious
organizations'' be included in the Rule to set clear boundaries for
what kinds of groups were intended to be included.\103\ Hudson Bay
stated that ``establishing governmentally preferred groups, such as
religious organizations or political parties, and providing them with
superior access to the public, is in our opinion unquestionably a
violation of the Fourteenth Amendment's guarantee of equal protection
and of the First Amendment.''\104\ Similarly, DMA-Nonprofit stated
``the Commission has no authority to single out agents of religious
organizations for exemption . . . . [T]here is no language in the [USA
PATRIOT Act] that allows the Commission to make this
distinction.''\105\
---------------------------------------------------------------------------
\102\ Proposed Rule Sec. 310.2(f).
\103\ NASCO-NPRM at 6.
\104\ Hudson Bay-NPRM at 12.
\105\ DMA-NonProfit-NPRM at 5-6. See also Not-for-Profit
Coalition-NPRM at 41.
---------------------------------------------------------------------------
Based on careful consideration of the record, the Commission is
persuaded that no exemptions based upon the type of organization
engaged in telemarketing are warranted, and that all telemarketing (as
defined in the Telemarketing Act as amended by the USA PATRIOT Act)
conducted by any entity within its jurisdiction should be covered by
the TSR. This does not mean that the Commission believes political
fundraising is within the scope of the Rule.\106\ It means only that
the TSR applies to all calls that are part of any ``plan, program, or
campaign'' that is conducted by any entity within the FTC's
jurisdiction, involving more than one interstate telephone call for the
purpose of inducing a purchase of goods or services or a charitable
contribution, donation, or gift of money or any other thing of value.
Thus, for example, if a for-profit telemarketer on behalf of a
[[Page 4590]]
(presumably non-profit) political club or constituted religious
organization were to engage in a ``plan, program, or campaign''
involving more than one interstate telephone call to induce a purchase
of goods or services or a charitable contribution, that activity would
be within the scope of the TSR. But if such a for-profit telemarketer
on behalf of the same client made calls that were not for the purpose
of inducing a purchase of goods or services or a charitable
contribution, those calls would not be within the scope of the TSR.
---------------------------------------------------------------------------
\106\ The USA PATRIOT Act is consistent with a basic common law
distinction between charities and political organizations. ``Gifts
or trusts for political purposes or the attainment of political
objectives generally have been regarded as not charitable in nature.
Also . . . a trust to promote the success of a political party is
not charitable in nature.'' 15 Am. Jur. 2d Charities Sec. 60
(2002). In this regard, it is noteworthy that Congress elsewhere has
established a regulatory scheme applicable to political fundraising.
2 U.S.C. Sec. Sec. 431-455.
---------------------------------------------------------------------------
Commenters also addressed the scope of the term ``or any thing of
value'' in the definition of ``charitable contribution'' in the
proposed Rule, suggesting exemptions to limit this definition. Red
Cross urged the Commission to exempt blood from the definition of
``charitable contribution'' because, it argued, ``blood donations are
not 'a thing of value' in a fiduciary sense.''\107\ Blood Centers
agreed with this position, arguing that while ``the donor's blood is of
great value to the recipient of the blood donation . . . the donor is
not being asked to part with anything other than his or her
time.''\108\ Blood Centers also argued that donations of blood are of
grave importance to save lives, and so are distinguishable from typical
commercial and even charitable telemarketing calls.\109\ Another
argument raised by Blood Centers in support of its position that a
blood donation should be excluded from the definition of ``charitable
contribution'' is that blood donation programs are highly regulated by
the Food and Drug Administration (``FDA'').\110\ March of Dimes also
requested that volunteers' time not be considered a ``thing of value''
under the Rule, noting that their organization often uses the telephone
to contact volunteers who then solicit contributions from their friends
and neighbors.\111\
---------------------------------------------------------------------------
\107\ Red Cross-NPRM at 3.
\108\ Blood Centers-NPRM at 2.
\109\ Id.
\110\ Id. at 2-3.
\111\ March of Dimes-NPRM at 2. See also AFP-NPRM at 5.
---------------------------------------------------------------------------
The Commission believes that the text of the USA PATRIOT Act
provision expanding the definition of telemarketing to include calls to
induce ``a charitable contribution, donation, or gift of money or any
other thing of value'' is broad in scope and plain in meaning. The USA
PATRIOT Act specifically uses the term ``or any other thing of value''
in addition to the terms ``charitable contribution, donation, or gift
of money,'' ensuring that it will encompass non-money contributions.
The Commission believes that, while blood donors are asked for blood
and not money, the blood they donate is clearly a ``thing of
value.''\112\ Similarly, although volunteers are asked to give time
rather than money, the Commission believes that a donation of time is a
``thing of value.''\113\ Therefore, the Commission cannot exempt from
the definition of ``charitable contribution'' either blood or time
volunteered. The Commission believes, however, that legitimate concern
about inclusion of blood in the definition should be alleviated by the
exemption of charitable solicitation telemarketing from the ``do-not-
call'' registry provisions. The remaining provisions that will apply to
telemarketing to solicit blood donations are neither burdensome nor
likely to impede the mission of the non-profit organizations that seek
such donations.
---------------------------------------------------------------------------
\112\ See Maryland Health Care, Fall 2000 at 4, http://www.mdhospitals.org/MarylandPubs/MDHlthCr_1100.pdf
(noting the
blood shortages had driven up the price of blood from $145.24 per
unit to $174.10 per unit in a single year).
\113\ Presumably, organizations that rely on volunteers would,
absent their donations of time, be forced to pay labor costs
associated with the work done by volunteers. Therefore, the time
donated is a ``thing of value,'' equivalent to the labor cost saved.
---------------------------------------------------------------------------
NAAG and NASCO suggested that the Commission ``state that the word
`charitable' does not limit the character of the recipient of the
contribution.''\114\ According to these commenters, it is important to
ensure that donations solicited by or on behalf of public safety
organizations are considered ``charitable contributions'' for
regulatory purposes, and that those contributions solicited by sham
charities are still ``charitable contributions'' under the amended
Rule.\115\ The Commission believes that the current definition, which
closely tracks the USA PATRIOT Act definition, is clear as to what is
covered.\116\ Its focus is on the donation, rather than the solicitor,
and it is sufficiently broad in scope to encompass donations solicited
on behalf of any organization.
---------------------------------------------------------------------------
\114\ NAAG-NPRM at 52; NASCO-NPRM at 5-6.
\115\ Id.
\116\ 15 Am. Jur. 2d Charities Sec. 60 (2002).
---------------------------------------------------------------------------
NAAG and NASCO also requested that the Commission explicitly
address the situation where a call involves ```percent of purchase'
situations, where contributions are sought in the form of the purchase
of goods or services, [and] where a portion of the price will,
according to the solicitor, be dedicated to a charitable cause.''\117\
These commenters urged the Commission to ensure that such hybrid
transactions are covered, either as sales of goods or services or as
charitable contributions, or both, under the Rule.\118\ The Commission
believes that when the transaction predominantly is an inducement to
make a charitable contribution, such as when an incentive of nominal
value is offered in return for a donation, the telemarketer should
proceed as if the call were exclusively to induce a charitable
contribution. Similarly, if the call is predominantly to induce the
purchase of goods or services, but, for example, some portion of the
proceeds from this sale will benefit a charitable organization, the
telemarketer should adhere to the portions of the Rule relevant to
sellers of goods or services. The Commission believes that further
elaboration on the differences between these scenarios is unnecessary
because, in either case, the requirements are similar, consisting
primarily of avoiding misrepresentations, and promptly disclosing
information that would likely be disclosed in the ordinary course of a
telemarketing call.
---------------------------------------------------------------------------
\117\ NAAG-NPRM at 52. See also NASCO-NPRM at 5-6.
\118\ Id.
---------------------------------------------------------------------------
Sec. 310.2(m) -- Donor
The proposed Rule contained a definition of ``donor'' in order to
effectuate the goals of the USA PATRIOT Act amendments. Under that
definition, a ``donor'' is ``any person solicited to make a charitable
contribution.''\119\ Throughout the proposed Rule, wherever the word
``customer'' was used, the Commission added the word ``or donor'' where
appropriate, to indicate that the provision was also applicable to the
solicitation of charitable contributions. The Commission received very
few comments on this definition. The March of Dimes expressed the
concern that ``[t]he definition of a `donor' does not accurately
reflect the nomenclature used by the industry.''\120\ Rather, the March
of Dimes suggested, the term ``donor,'' as used in philanthropic
circles, ``connotes an established relationship with the non-profit
charitable organization.''\121\ The March of Dimes recommended
replacing the terms ``customer'' and ``donor'' in the Rule with the
term ``consumer.''
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\119\ Proposed Rule Sec. 310.2(m), 67 FR at 4540.
\120\ March of Dimes-NPRM at 3.
\121\ Id. (noting that the term ``prospect'' is used to mean a
potential donor).
---------------------------------------------------------------------------
The Commission believes that the term ``consumer'' is too broad and
non-specific to substitute for the terms
[[Page 4591]]
``customer'' and ``donor.''\122\ The Rule uses these more targeted
terms to capture the varied nature of transactions between sellers or
telemarketers and individuals who are, or may be, required to pay for
something as the result of a telemarketing solicitation. Thus, it is
the intent of the Commission that the term ``donor'' as used in the
Rule encompass not only those who have agreed to make a charitable
contribution, but also any person who is solicited to do so, to be
consistent with its use of the term ``customer.'' Therefore, the
Commission has determined that the term ``donor'' is necessary and
appropriate, and has retained the definition of ``donor'' in the
amended Rule without modification.
---------------------------------------------------------------------------
\122\ The term ``consumer'' is defined generally as ``one that
utilizes economic goods.'' Merriam-Webster's Collegiate Dictionary,
at: http://www.merriamwebster.com/cgi-bin/dictionary. This
broader term is used in the Rule in the definition of ``established
business relationship,'' Sec. 310.2(n), and in the provision
banning the transfer of unencrypted account numbers, Sec.
310.4(a)(5). In each of these instances, the Commission has
consciously used the broader term ``consumer'' to effect broader
Rule coverage.
---------------------------------------------------------------------------
Sec. 310.2(n) -- Established business relationship
The Commission has determined to add to the Rule a definition of
``established business relationship.'' This new definition comes into
play in Sec. 310.4(b)(1)(iii), which now exempts from the national
``do-not-call'' registry calls from sellers with whom the consumer has
an ``established business relationship'' (unless that consumer has
asked to be placed on that seller's company-specific ``do-not-call''
list). This definition limits the exemption to relationships formed by
the consumer's purchase, rental, or lease of goods or services from, or
financial transaction with, the seller within eighteen months of the
telephone call (or, in the case of inquiries or applications, within
three months of the call).
Industry comments were nearly unanimous in emphasizing that it is
essential that sellers be able to call their existing customers.\123\
Although the initial comments from consumer groups opposed an exemption
for ``established business relationships,''\124\ their statements
during the June 2002 Forum and in their supplemental comments expressed
the view that such an exemption would be acceptable, as long as it was
narrowly-tailored and limited to current, ongoing relationships.\125\
Moreover, state law enforcement representatives' comments on their
experience with state ``do-not-call'' laws that have an exemption for
``established business relationships'' suggest that this type of
exemption is consistent with consumer expectations.\126\ While the
Commission is persuaded that an ``established business relationship''
exemption is necessary and appropriate, it believes that the exemption
must be narrowly crafted and clearly defined to avoid a potential
loophole that could defeat the purpose of the national ``do-not-call''
registry.
---------------------------------------------------------------------------
\123\ See, e.g., AFSA-NPRM at 13-14; AmEx-NPRM at 3; ANA-NPRM at
5; ARDA-NPRM at 17; ATA-NPRM at 29; BofA-NPRM at 4; Best Buy-NPRM at
1; DialAmerica-NPRM at 12; DMA-NPRM at 33-34; DSA-NPRM at 7-8; ERA-
NPRM at 36-37; Gottschalks-NPRM at 1; NCTA-NPRM at 6; NRF-NPRM at
13; PMA-NPRM at 28; Roundtable-NPRM at 5; SIIA-NPRM at 2-3; Time-
NPRM at 6-7; VISA-NPRM at 3. See also, e.g., ARDA-Supp. at 1; ICTA-
Supp. at 2.
\124\ See, e.g., EPIC-NPRM at 20-21; NCL-NPRM at 10. Among other
things, consumer advocates opposed such an exemption because of the
difficulty in defining a ``pre-existing business relationship''
without creating significant loopholes in the protections provided
by the national ``do-not-call'' registry (described in the
discussion of amended Rule Sec. 310.4(b)(1)(iii) below). See NCL-
NPRM at 10. Furthermore, they did not agree with industry's argument
that consumers want to hear from companies with whom they have an
existing relationship. NCL stated that the fact that a consumer may
have had a relationship with a company does not necessarily mean
that he or she wishes to receive calls, or to continue to receive
calls, from that company. NCL-NPRM at 10. Consumer advocates
believed the FTC had taken the right approach: the burden should lie
with the seller to show specific consent to receive calls. NCL-NPRM
at 10; EPIC-NPRM at 20-21; PRC-NPRM at 2.
\125\ June 2002 Tr. I at 110 (NCL) (``This would have to be . .
. really narrowly defined in order to protect consumers so that if
somebody had something that was ongoing . . . that would be in a
different category.''). See also AARP-Supp. at 3 (``AARP recognizes
that there may be an expectation by consumers that they will be in
contact with businesses with whom they have current, ongoing,
voluntary relationship; calls from such businesses are not
necessarily unwanted or unsolicited. Calls made from a business with
which consumers had a prior relationship are a different matter
altogether. In situations where the consumer has chosen not to
continue a business relationship, it cannot be presumed they wish to
be solicited by that business again. Therefore, AARP believes that
any exemption for an existing business relationship must be limited
to those situations where the relationship is current, ongoing,
voluntary, involves an exchange of consideration, and has not been
terminated by either party.'').
\126\ June 2002 Tr. I at 110-19. See also June 2002 Tr. I at
119-22, in which participants discussed an AARP survey conducted in
conjunction with the Missouri Attorney General's Office, which
showed that three-fourths of consumers did not feel an established
business relationship was justified. However, representatives from
the Missouri Attorney General's Office explained that the results
were less a measure of consumer condemnation of such an exemption,
than an indication that consumers were receiving calls from
businesses with whom they did not perceive that they had such a
relationship. According to the Missouri representatives, businesses
took a broader view of the relationship than did consumers. As noted
in more detail below, consumers appear to be comfortable with an
exemption for ``established business relationships'' once its
parameters are explained to them.
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In adopting the ``do-not-call'' provisions of the original Rule,
the Commission considered, among other things, the approach taken by
Congress and the FCC in the TCPA and its implementing regulations.\127\
In crafting an ``established business relationship'' definition, it is
useful again to consider the TCPA, which specifically exempts calls
``to any person with whom the caller has an established business
relationship.''\128\ The House Report on the TCPA's ``established
business relationship'' exemption confirms that Congress intended for
the reasonable expectation of the consumer to be the touchstone of the
exemption:
---------------------------------------------------------------------------
\127\ 60 FR at 43855.
\128\ 47 U.S.C. 227(a)(3)(B). The legislative history of the
TCPA shows that Congress exempted ``established business
relationship'' calls ``so as not to foreclose the capacity of
businesses to place calls that build upon, follow-up, or renew,
within a reasonable period of time, what had once been an existing
customer relationship.'' H.R. REP. NO. 102-317 at 13 (1991).
Throughout the House Report discussing the exemption for
``established business relationship,'' the point is stressed that
the exemption is intended to reach only those relationships that are
current or recent. The Report consistently refers to an
``established business relationship'' in terms of ``the existence of
the relationship at the time of the solicitation, or within a
reasonable time prior to it.'' Id. at 13-15. (emphasis added).
In the Committee's view, an ``established business relationship''
also could be based upon any prior transaction, negotiation, or
inquiry between the called party and the business entity that has
occurred during a reasonable period of time. . . . By requiring this
type of relationship, the Committee expects that otherwise objecting
consumers would be less annoyed and surprised by this type of
unsolicited call since the consumer would have a recently
established interest in the specific products or services. . . . In
sum, the Committee believes the test to be applied must be grounded
in the consumer's expectation of receiving the call.\129\
---------------------------------------------------------------------------
\129\ Id. at 14, 15.
When it promulgated its rules pursuant to the TCPA, the FCC included
the following definition of ``established business relationship'' with
---------------------------------------------------------------------------
regard to its company-specific ``do-not-call'' requirements:
The term established business relationship means a prior or existing
relationship formed by a voluntary two-way communication between a
person or entity and a residential subscriber with or without an
exchange of consideration, on the basis of an inquiry, application,
purchase or transaction by the residential subscriber regarding
products or services offered by such person or entity, which
relationship has not been previously terminated by either
party.\130\
---------------------------------------------------------------------------
\130\ 47 CFR 64.1200(f)(4).
Consideration of state approaches to the ``established business
relationship''
[[Page 4592]]
exemption is also instructive. Most state ``do-not-call'' laws have
some form of exemption for ``established business relationships,'' and
several of these are modeled on the language of the FCC's
exemption.\131\ However, there is an important difference between the
FCC approach and that of many of the states, in that many state law
exemptions circumscribe the scope of an ``established business
relationship'' by specifying the amount of time after a particular
event (like a purchase) during which such a relationship may be deemed
to exist.\132\ The Commission believes that this approach is more in
keeping with consumer expectations than an open-ended exemption. As
discussed in more detail below, many consumers favor an exemption for
companies with whom they have an established relationship. Consumers
also might reasonably expect sellers with whom they have recently dealt
to call them, and they may be willing to accept these calls. A purchase
from a seller ten years ago, however, would not likely be a basis for
the consumer to expect or welcome solicitation calls from that seller.
---------------------------------------------------------------------------
\131\ Fourteen state ``do-not-call'' statutes are open-ended and
do not contain a time limit for tolling the established business
relationship: Alabama, California, Connecticut, Florida, Georgia,
Idaho, Kentucky, Maine, Minnesota, Oregon, Texas, Vermont,
Wisconsin, and Wyoming. Three of these ``open-ended'' state statutes
incorporate the FCC definition either in whole or in part:
California, Texas, and Wyoming. In addition, four other states
incorporate the FCC definition in whole or in part, but limit the
time period during which a business may claim an ``established
business relationship'' once the relationship has lapsed: Colorado,
Kansas, Oklahoma, and Pennsylvania. See note 592 below for citations
to all state ``do-not-call'' statutes.
\132\ See discussion and note 135 below.
---------------------------------------------------------------------------
In addition, specific time limits for an ``established business
relationship'' are particularly appropriate for a general ``do-not-
call'' registry such as the one to be maintained by the Commission, as
opposed to the company-specific ``do-not-call'' lists for which the FCC
definition was crafted. The Commission believes that an ``established
business relationship'' exemption in a national list applying to many
sellers and telemarketers should be carefully and narrowly crafted to
ensure that appropriate companies are covered while excluding those
from whom consumers would not expect to receive calls. A specific time
limit balances the privacy needs of consumers and the need of
businesses to contact their current customers.
Comments received in response to the NPRM stress the importance of
extending such an exemption to current, existing relationships and
prior relationships that occurred within a reasonable period of
time.\133\ Throughout the comments from industry stressing the need for
an ``established business relationship'' exemption, a consistent theme
is that such an exemption is necessary for ``existing customers'' or
someone with whom sellers ``currently do business,'' and there seems to
be a common understanding regarding what constitutes an ``existing''
relationship.\134\ There is less consensus when it comes to the issue
of how long a business relationship lasts following a transaction
between a seller and consumer. Many states have attempted to provide
some clarity regarding how long after dealings between a consumer and
seller have ceased that a residual ``established business
relationship'' could be deemed still to exist.
---------------------------------------------------------------------------
\133\ The comments received on ``established business
relationship'' came primarily from the business community. On the
other hand, there was little comment from consumer advocates and
state regulators on how such an exemption would be formulated
because the proposed Rule did not include an ``established business
relationship'' exemption. However, the NPRM did ask about the effect
on companies and charitable organizations with whom consumers had a
pre-existing business or philanthropic relationship of the proposal
to allow companies to call consumers on the ``do-not-call'' registry
if they had given their express verifiable authorization to call (67
FR at 4539, question 9). As discussed in more detail above in note
124, those few consumer advocates who did mention such an exemption
were opposed to it.
\134\ See, e.g., ABA-NPRM at 10; Community Bankers-NPRM at 2;
AmEx-NPRM at 3; ANA-NPRM at 5; Associations-NPRM at 2; ARDA-NPRM at
17; Bank One-NPRM at 4; BofA-NPRM at 4; Best Buy-NPRM at 1; Cendant-
NPRM at 5-6; Citigroup-NPRM at 4; Comcast-NPRM at 3; CMC-NPRM at 6;
Cox-NPRM at 2, 4; DMA-NPRM at 33, 34; Eagle Bank-NPRM at 2;
Roundtable-NPRM at 5; Gottschalks-NPRM at 1; NCTA-NPRM at 4; NRF-
NPRM at 13; SIIA-NPRM at 2-3; Time-NPRM at 6; VISA-NPRM at 3.
---------------------------------------------------------------------------
Twelve of the states that have an ``established business
relationship'' exemption limit it to a specific time period after a
transaction has occurred, ranging from six months to 36 months.\135\
Industry commenters suggested various time periods to limit the
exemption. Several suggested 24 to 36 months, while others stated that
a shorter period (12 months) would be more appropriate.\136\ The
Commission believes, based on the record evidence and statements from
Congress regarding the TCPA's ``established business relationship,''
that a company should be able to claim the exemption only if there has
been a relatively recent transaction between the customer and the
seller sufficient to support the existence of an ``established business
relationship.''
---------------------------------------------------------------------------
\135\ Six months (Louisiana, Missouri); 12 months (Pennsylvania,
Tennessee); 18 months (Colorado, Illinois); 24 months (Alaska,
Massachusetts, Oklahoma); 36 months (Arkansas, Kansas). In addition,
New York apparently has adopted an 18-month time period: the New
York statute does not contain a time limit; however, at the June
2002 Forum, NYSCPB stated that New York applies an 18-month time
limit. June 2002 Tr. I at 115 (``We have two separate exemptions. .
. . The second thing is a prior business relationship, which we
define as an exchange of goods and services for consideration within
the preceding 18 months. . . .''). Indiana's statute does not have
an exemption for ``established business relationships.''
\136\ Industry commenters generally supported a 24-month time
period, but did not submit data that would tend to show that a
shorter time period would not serve their purposes. The breakdown of
suggested time periods is as follows: ``recently terminated or
lapsed'' (New Orleans-NPRM at 14-15); 12 months (BofA-NPRM at 4;
CMC-NPRM at 6-7); 24 months (ATA-Supp. at 8; ERA-NPRM at 38; ERA-
Supp. at 19; MPA-Supp. at 11; NAA-NPRM at 11; June 2002 Tr. I at 109
(PMA)); 36 months (ARDA-NPRM at 20; Associations-Supp. at 3-4). In a
supplement to their comment, FDS supported limiting telemarketing
sales calls to customers who have made a purchase in the past 12
months, while allowing strictly informational calls to persons who
have had a transaction within the past 36 months. Federated-Supp. at
1-2.
---------------------------------------------------------------------------
Based on the comments, the Commission finds little support for a
36-month time period. Most of the commenters who suggested that time
period did so as part of a joint comment filed by five
associations.\137\ In the comments the individual associations filed
separately, however, they suggested a time period of 24 months.\138\
NAA initially suggested 24 months, but expanded that to 36 months in
its supplemental comment. Industry commenters who advocate 24 months
provide little support for their assertion that it is the appropriate
length of time by which to measure ``reasonableness;'' nor did they
submit data that would show that a shorter time period would not serve
their purposes. Other industry members (such as Bank of America,
Consumer Mortgage Coalition, and Federated Department Stores) suggested
shorter time periods. The Commission does not believe that a
relationship which terminated or lapsed two years ago would constitute
a relationship that had recently terminated or lapsed. The Commission
believes that if consumers received a call from a company with whom the
most recent purchase, rental, lease or financial transaction occurred
or lapsed two years ago or longer, consumers would likely be surprised
by that call and find it to be unexpected.
---------------------------------------------------------------------------
\137\ See Associations-NPRM at 3-4.
\138\ See note 136 above.
---------------------------------------------------------------------------
The Commission believes that 18 months is an appropriate time frame
because it strikes a balance between industry's needs and consumers'
privacy rights and reasonable expectations about who may call them and
when. By extending beyond a single annual sales cycle, the 18-month
period allows sufficient time for businesses to renew contact with
prospects who may only purchase once a year. Moreover,
[[Page 4593]]
limiting the ``established business relationship'' to 18 months from
the date of the last purchase or transaction would be at least as
restrictive as the majority of states that have such an exemption, thus
achieving greater consistency for both industry and consumers. The
experience of states that have an ``established business relationship''
exemption in their ``do-not-call'' laws indicates that a relatively
limited ``established business relationship'' exemption does not
conflict with consumers' expectations. At the June 2002 Forum, the
representatives from New York and Missouri spoke about consumer
expectations in connection with their states' ``do-not-call''
lists.\139\ Both noted that consumers appeared to be comfortable with
such an exemption because they had received few complaints from
consumers regarding companies with whom they had an established
relationship.\140\ The states' experience is not contradicted by the
comments of individual consumers in response to a specific question
included on the Commission's website inviting email comments from the
public. Although 60 percent of consumers who responded to this question
stated that they opposed an exemption for ``established business
relationship,'' 40 percent favored such an exemption.\141\
---------------------------------------------------------------------------
\139\ See June 2002 Tr. I at 110-21.
\140\ Id. at 118-19 (New York: ``Well, [consumers are not
unhappy], and a lot of times they complain, and you could say
they're [sic] prima facie evidence they're unhappy. We call them
back and say, gee, did you have a transaction with these folks? They
claim you did on X, Y and Z, and they furnished us this paperwork.
And then they say, oh, yeah. They don't seem to be mad.'')
(Missouri: ``Most people when you call them back are delighted that
70 to 80 percent of their phone calls have been caused to not come
in, so when we explain to them that you had a relationship or you
explain to them that some of these calls are exempt, they understand
when you explain that to them, and they're delighted, because our
anecdotal information shows that 70 to 80 percent of the calls
people had been receiving, they're not receiving now.'').
\141\ Analysis of consumer email comments in the Commission's
TSR comment database indicates that about 860 favored an exemption
for calls from firms with whom they already have an established
relationship, while about 1,080 opposed such an exemption.
Furthermore, over 13,000 of the 14,971 comments submitted by
Gottschalks' customers supported allowing Gottschalks to call them
even if they signed up on a ``do-not-call'' registry to block other
calls.
---------------------------------------------------------------------------
Furthermore, a study conducted in 2002 by the Information Policy
Institute found that consumers preferred a ``nuanced approach'' to the
``do-not-call'' issue, wanting to limit some calls to their household,
but not all calls.\142\ According to the study, 50 percent of consumers
surveyed supported regulations that would allow local or community-
based organizations to call during specific hours of the day.\143\
Furthermore, slightly less than half of the respondents supported
legislation that would allow calls, but only from local or community-
based organizations with whom they have an existing relationship.\144\
The survey showed that consumers were less likely to welcome calls from
national companies, although 40 percent indicated that they would allow
calls from national organizations with whom they had an existing
relationship.\145\
---------------------------------------------------------------------------
\142\ Michael A. Turner, ``Consumers, Citizens, Charity and
Content: Attitudes Toward Teleservices'' (Information Policy
Institute, June 2002) at 4, 8 (hereinafter ``Turner study'').
\143\ Id.
\144\ Id.
\145\ Id.
---------------------------------------------------------------------------
In sum, consumers are split over whether they favor an
``established business relationship'' exemption. Given the difference
of opinion among consumers, and industry's convincing arguments
regarding the detrimental effects the lack of an exemption would cause,
the Commission is persuaded to provide an exemption for ``established
business relationships.''
The definition of ``established business relationship'' in the
amended Rule would limit the exemption in the case of inquiries and
applications to three months after the date of the application or
inquiry (except with the consumer's express consent or permission to
continue the relationship). The Commission believes that a consumer's
reasonable expectations are different in the case of inquiries and
applications as compared to purchase, rental, and lease transactions. A
simple inquiry or application would reasonably lead to an expectation
of a prompt follow-up telephone contact close in time to the initial
inquiry or application, not one after an extended period of time.
Comments from NYSCPB at the June 2002 Forum also warned of possible
abuse in the creation of an ``established business relationship'' based
on inquiries from consumers.\146\ The Commission believes three months
should be a sufficient time frame in which to respond to a consumer's
inquiry or application.
---------------------------------------------------------------------------
\146\ [146]: June 2002 Tr. I at 116 (NYSCPB) (``[D]oes a mere
inquiry constitute a business relationship? And our answer to that
is no, because we have had some what I would say are really sleazy
operators. They will call up and leave a message on your phone. They
won't even identify who they are. They will simply say `Call us
back, it's very important.' You call back out of curiosity or
whatever, okay, and then all of a sudden they feel free to bombard
you for the next few years with calls.''). The Commission intends
that such a practice would not entitle a seller or telemarketer to
make calls to consumers by claiming to have an ``established
business relationship.''
---------------------------------------------------------------------------
The amended Rule allows for an 18-month time limit where there has
been a purchase, rental or lease, or other financial transaction
between the customer and seller. The 18-month time limit for an
``established business relationship'' based on a purchase, lease,
rental, or financial transaction runs from the date of the last payment
or transaction, not from the first payment. In instances where
consumers pay in advance for future services (e.g., purchase a two-year
magazine subscription or health club membership), the seller may claim
the exemption for 18 months from the last payment or shipment of the
product. For such ongoing relationships, it makes little difference to
likely consumer expectations whether the purchase was financed over
time or paid for up front. Sellers who provide products or services
where the consumer is required to pay in advance can also get the
consumer's express agreement to call, as provided in Sec.
310.4(b)(1)(iii)(B)(i).
Several financial services industry commenters urged that any
``established business relationship'' exemption should encompass all
affiliates of a seller.\147\ These commenters noted that regulatory
requirements often dictate the corporate structure of financial
institutions, which must market products and services across holding
company affiliates and subsidiaries.\148\ For that reason, they
suggested that any exemption for an ``established business
relationship'' should extend to all members of a corporate family,
including affiliates and subsidiaries, so long as the individual has an
``established business relationship'' with any member of that corporate
family.\149\ They also suggested that agents of the seller be included
within the exemption if the consumer reasonably would expect the agent
to be included under the exception.\150\
---------------------------------------------------------------------------
\147\ See, e.g., BofA-NPRM at 4; Bank One-NPRM at 4; Eagle Bank-
NPRM at 2; Roundtable-NPRM at 5; Fleet-NPRM at 4; VISA-NPRM at 3-4.
\148\ See Bank One-NPRM at 4; Fleet-NPRM at 4.
\149\ See Eagle Bank-NPRM at 2; HSBC-NPRM at 2; Roundtable-NPRM
at 5.
\150\ See Roundtable-NPRM at 5.
---------------------------------------------------------------------------
The Commission believes that such a broad definition of
``established business relationship'' is inappropriate in the context
of a ``do-not-call'' registry which is intended to protect consumers'
privacy. As stated earlier, the Commission believes that such an
exemption must be narrowly crafted to avoid defeating the purpose of
the ``do-not-call'' registry. In determining whether affiliates or
subsidiaries should
[[Page 4594]]
be encompassed within an ``established business relationship,'' the
Commission looks to consumer expectations: If consumers received a call
from a company that is an affiliate or subsidiary of a company with
whom they have a relationship, would consumers likely be surprised by
that call and find it inconsistent with having placed their telephone
number on the national ``do-not-call'' registry?
The Commission used similar reasoning in resolving this issue in
connection with the definition of ``seller'' in the original Rule. In
the discussion on the definition of ``seller,'' the Commission stated
that there were several factors that it would consider in determining
how it would view the Rule's application to diversified companies or
divisions within one parent organization. Among those factors was
``whether the nature and type of goods or services offered by the
division are substantially different from those offered by other
divisions of the corporation or the corporate organization as a
whole.''\151\ This distinction looks to consumer expectations and
whether a consumer would perceive the division to be the same as or
different from other divisions or from the corporate organization as a
whole. For example, a consumer who had purchased aluminum siding from
Company A's aluminum and vinyl siding subsidiary would likely not be
surprised to receive a call from kitchen remodeling service also owned
by, and operating under the name of, Company A.
---------------------------------------------------------------------------
\151\ 60 FR at 43844.
---------------------------------------------------------------------------
Thus, under the amended Rule, some but not all affiliates will be
able to take advantage of the ``established business relationship''
exemption to the national ``do-not-call'' registry. The Commission
intends that the affiliates that fall within the exemption will only be
those that the consumer would reasonably expect to be included given
the nature and type of goods or services offered and the identity of
the affiliate. The consumer's expectations of receiving the call are
the measure against which the breadth of the exemption must be judged.
Sec. 310.2(o) -- Free-to-pay conversion
Section 310.2(o) of the amended Rule sets out a new definition:--
``free-to-pay conversion.'' In connection with an offer or agreement to
sell or provide goods or services, a ``free-to-pay conversion'' is ``a
provision under which a customer receives a product or service for free
for an initial period and will incur an obligation to pay for the
product or service if he or she does not take affirmative action to
cancel before the end of that period.'' The term ``free-to-pay
conversion'' is the terminology commonly used in the telemarketing
industry to describe what was referred to throughout the Rule Review
proceeding as a ``free trial offer.''\152\
---------------------------------------------------------------------------
\152\ See, e.g., Electronic Retailing Association, GUIDELINES
FOR ADVANCE CONSENT MARKETING, http://www.retailing.org/regulatory/publicpolicy_consent.html
; Magazine Publishers of America,
Resources - Research: ``Advance Consent Subscription Plans,'' http://www.magazine.org/resources/advance_consent.html
.
---------------------------------------------------------------------------
A ``free-to-pay conversion'' is a form of ``negative option
feature''--a term that is also newly defined in the amended Rule and is
discussed below. The term ``free-to-pay conversion'' comes into play in
the amended Rule in three provisions. First, as a form of negative
option feature, any ``free-to-pay conversion'' is subject to the newly-
added disclosure requirements in Sec. 310.3(a)(1)(vii). Second, where
a telemarketing offer involves a ``free-to-pay conversion,'' and is
accepted by a consumer using a payment method subject to the express
verifiable authorization requirements of Sec. 310.3(a)(3), the seller
or telemarketer may not use the written confirmation form of
authorization generally available under Sec. 310.3(a)(3)(iii). Third,
under the new unauthorized billing provision at Sec. 310.4(a)(6), the
amended Rule sets forth specific requirements to obtain express
informed consent in any transaction involving preacquired account
information and a ``free-to-pay conversion.'' Each of these provisions
is discussed in detail below.
Sec. 310.2(q)--Material
The amended Rule retains unchanged the definition of ``material''
from the original Rule, except for extending it to charitable
contributions pursuant to the mandate of the USA PATRIOT Act. The
Commission received no comments on this definition in response to the
NPRM. The amended Rule has deleted the designations for subsections (a)
and (b) that had been proposed in the NPRM. This is merely a formatting
change and does not alter the substantive content of the definition.
The amended Rule's definition of ``material,'' therefore, reads:
``likely to affect a person's choice of, or conduct regarding, goods or
services or a charitable contribution.''
Sec. 310.2(t)--Negative option feature
The amended Rule includes new requirements in Sec.
310.3(a)(1)(vii) for specific material disclosures necessary to avoid
misleading consumers with respect to offers that entail incurring an
obligation to pay a seller due to the consumers' non-action. To
describe the circumstances when these disclosures must be made, the
amended Rule employs the term ``negative option feature'' and,
accordingly, provides a definition of that term in Sec. 310.2(t). A
``negative option feature'' is any provision under which the consumer's
silence or failure to take an affirmative action to reject goods or
services or to cancel the agreement is interpreted by the seller as
acceptance of the offer. This provision includes, but is not limited
to, ``free-to-pay conversions,'' (which are discussed above), as well
as negative option plans\153\ and continuity plans.\154\ Section
310.3(a)(1)(vii) below provides a detailed discussion of the definition
of ``negative option feature'' and the disclosures necessary when such
a provision is a part of an offer to sell goods or services.
---------------------------------------------------------------------------
\153\ Under a ``negative option plan,'' the customer agrees to
purchase a specific number of items in a specified period of time.
The customer receives periodic announcements of the selections; each
announcement describes the selection, which will be sent
automatically and billed to the customer unless the customer tells
the company not to send it. See the Commission's Rule governing
``Use of Negative Option Plans by Sellers in Commerce,'' 16 CFR 425.
\154\ A ``continuity plan'' consists of a subscription to a
collection or series of goods. Customers are offered an introductory
selection and agree to receive additional selections on a regular
basis until they cancel their subscription. Unlike negative option
plans, customers do not agree to buy a specified number of
additional items in a specified time period, but may cancel their
subscriptions at any time. Continuity plans resemble negative option
plans in that customers are sent announcements of selections and
those selections are shipped automatically to the customer unless
the customer advises the company not to send them. Unlike negative
option plans, however, customers are not billed for the selection
when it is shipped, but only if they do not return the selection
within the time specified for the free examination period. See,
e.g., FTC Facts for Consumers, ``Continuity Plans: Coming to You
Like Clockwork,'' (June 2002), http://www.ftc.gov/bcp/online/pubs/products/continue.htm.
See also FTC, ``Pre-Notification Negative
Option Plans'' (May 2001) (distinguishing these plans from
continuity plans), http://www.ftc.gov/bcp/online/pubs/products/negative.htm
); and FTC, ``Facts for Business: Complying with the
Telemarketing Sales Rule,'' http://www.ftc.gov/bcp/online/pubs/buspubs/tsr.htm
.
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Sec. 310.2(u)--Outbound telephone call
Based on a review of the record, the Commission has decided to
retain the definition of ``outbound telephone call'' that was in the
original Rule, and not to expand the definition to include ``upsell''
transactions, as proposed in the NPRM. Many commenters noted that, by
including upselling in the proposed Rule's definition of ``outbound
telephone call,'' the proposal brought upselling transactions within
all of the provisions relating to outbound calls,
[[Page 4595]]
which led to unintended and undesirable consequences, such as
subjecting upsells to the calling time restrictions and national ``do-
not-call'' registry provisions.\155\ The amended Rule addresses
upselling transactions separately, rather than attempting to sweep them
within the definition of ``outbound telephone call.''\156\ The amended
Rule reinstates the original definition of ``outbound telephone call,''
with only a modification to reflect the expanded reach of the Rule to
charitable contributions pursuant to the USA PATRIOT Act. In the
amended Rule, then, an ```[o]utbound telephone call' means a telephone
call initiated by a telemarketer to induce the purchase of goods or
services or to solicit a charitable contribution.''
---------------------------------------------------------------------------
\155\ See, e.g., ABA-NPRM at 4; AmEx-NPRM at 6; AFSA-NPRM at 16;
Associations-NPRM at 3; Cendant-NPRM at 2; CCC-NPRM at 13; Cox-NPRM
at 6; KeyCorp-NPRM at 6; Metris-NPRM at 9; MBA-NPRM at 4; NBCECP-
NPRM at 2; NCTA-NPRM at 13-14; PCIC-NPRM at 1; PMA-NPRM at 10-11;
Time-NPRM at 10; VISA-NPRM at 8; Wells Fargo-NPRM at 5-6.
\156\ See Sec. 310.2(dd), defining the term ``upselling'' in
the amended Rule.
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Sec. 310.2(w)--Preacquired account information
The amended Rule adds a definition of ``preacquired account
information'' to address the problems that have been associated with
telemarketing transactions where the telemarketer already has access to
the customer's billing information at the time the outbound call is
placed.\157\ The NPRM discussed these problems at length. The
Commission used the term ``preacquired account telemarketing'' in the
NPRM during its discussion of the proposed ban on disclosing or
receiving billing information for use in telemarketing, but did not use
the term itself in the proposed Rule, and so did not define it.\158\ In
response, several industry commenters asked for more specificity as to
what the Commission intends the term to mean.\159\ Thus, the definition
of ``preacquired account information'' also serves to address these
commenters' concerns about clarifying the concept of preacquired
account telemarketing.
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\157\ See discussions of amended Rule Sec. Sec. 310.4(a)(5) and
(6) below.
\158\ See 67 FR at 4512-14.
\159\ See, e.g., June 2002 Tr. II at 123-24 (CCC), 133-34 (ERA)
and 173 (ATA); PMA-NPRM at 13-14; MPA-Supp. at 5; PRA-NPRM at 13-14.
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As explained in detail in the discussion of Sec. 310.4(a)(6)
below, the amended Rule sets forth specific requirements for obtaining
express informed consent in any telemarketing transaction that involves
``preacquired account information.'' To clarify the situations where
these requirements come into play, the amended Rule defines
``preacquired account information'' as:
any information that enables a seller or telemarketer to cause a
charge to be placed against a customer's or donor's account without
obtaining the account number directly from the customer or donor
during the telemarketing transaction pursuant to which the account
will be charged.
The Commission intends this definition to be construed broadly. The
definition includes any type of billing information, encrypted or
unencrypted,\160\ that enables a seller or telemarketer to cause a
charge to be placed on any customer's or donor's account without
obtaining the account number directly from the customer or donor. It
obviously covers instances where the seller or telemarketer is in
actual possession of account information, whether by virtue of some
prior relationship with the consumer or otherwise. It also is intended
specifically to address affinity marketing campaigns where, for
example, through a joint marketing arrangement, Seller A provides
access to its customer base and those customers' accounts or account
numbers to Seller B in exchange for a percentage of the proceeds from
each sale.\161\
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\160\ By ``unencrypted,'' the Commission means both unencrypted
readable account information, and encrypted information in
combination with a decryption key. See discussion of amended Rule
Sec. 310.4(a)(5) below.
\161\ See 67 FR at 4513.
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Some industry members expressed their belief that this second class
of transactions does not involve preacquired account information at all
because, in such affinity marketing campaigns, Seller B may possess
only encrypted account numbers, or no account numbers at all prior to
initiating the call to the consumer.\162\ The Commission intends to
clarify that such an arrangement does involve ``preacquired account
information,'' since the seller or telemarketer does not have to obtain
the account number from the customer or donor in order to cause a
charge to be placed on the customer's or donor's account.
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\162\ ERA/PMA-Supp. at 14; June 2002 Tr. II at 134 (ERA). ERA
described such a scenario during the June 2002 Forum:
``What typically might occur is L.L. Bean might enter into some
type of [affinity] agreement with Timberland to say, We would like
you to sell your boots . . . to our customers. . . . So L.L. Bean
would provide the name and telephone number . . . and they might
provide some unique identifier, it could be a four digit code. It
might be an encrypted code that's used solely for the purpose of
matching back, but the account billing number or any information
that would provide access to the account is not transmitted to the
telemarketer when you make that call. They make the call to the
consumer. They ask the consumer if they want to order the boots. If
the customer says yes, that information is then transferred to
Timberland. Timberland would go back to L.L. Bean and say, This
customer has accepted our offer. We would now like to get the
account information to bill the consumer for something that they've
authorized.''
June 2002 Tr. II at 136-37.
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Finally, this definition would apply to upsell transactions,
because the seller or telemarketer in the upsell transaction may either
already possess the account information from the initial transaction,
or would, by virtue of a joint marketing or other arrangement, have
access to that information, so as to be able to charge the customer
without getting the account number directly from the customer in the
upsell transaction.
Sec. 310.2 (cc) -- Telemarketing
The Commission received very few comments on its proposed
definition of ``telemarketing,''\163\ but those it did receive
expressed agreement that the definition should continue to include the
phrase ``by use of one or more telephones,'' to ensure that large and
small telemarketing operations are covered by the Rule.\164\ Based on
the Commission's review of the record in this proceeding, the amended
Rule retains unchanged the definition of ``telemarketing'' that was
proposed in the NPRM. This definition is virtually the same as that in
the original Rule, except that it now includes the phrase ``or a
charitable contribution'' following ``goods or services,'' pursuant to
the mandate of the USA PATRIOT Act.
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\163\ Although few commenters directly addressed this
definition, many who commented on the USA PATRIOT Act amendments
discussed the expansion of the Rule to cover the solicitation of
charitable contributions. These comments are addressed above, in the
discussion of amended Rule Sec. 310.1 relating to the scope of the
Rule.
\164\ DOJ-NPRM at 1 (noting its experience with fraudulent
telemarketers operating using only one or two telephones); Patrick-
NPRM at 2 (urging that the practice of subcontracting telemarketing
to individual sales agents who work from their homes using their
home phones continue to be captured by the Rule).
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Sec. 310.2(dd) -- Upselling
As described above in Sec. 310.2(u), the Commission proposed in
the NPRM to modify the Rule's definition of ``outbound telephone call''
to include most upsell transactions.\165\ The majority of commenters
who addressed this issue, including both industry members and consumer
groups,
[[Page 4596]]
supported the proposition that upsells should be expressly included in
the Rule.\166\ Most of these commenters, however, suggested that the
Commission's proposal to address the problem by expanding the
definition of ``outbound telephone call'' to include upselling was not
the most effective way to achieve this goal.\167\ Instead, many
commenters recommended treating upsells as a distinct type of
transaction by adding a definition of ``upselling'' to the Rule and
specifying a unique set of disclosures required in upsell
transactions.\168\ Others suggested retaining the expanded definition
of ``outbound telephone call'' but amending it to avoid application of
certain provisions unnecessary or inappropriate to the upselling
context,\169\ such as application of the ``do-not-call'' and calling
time provisions of the Rule, to upsells.\170\ The Commission does not
intend for upselling to be subject to the ``do-not-call'' requirements
or the calling time restrictions in the Rule.\171\ The goal of the
initial proposal,\172\ and the focus of the current amendments, is to
ensure that consumers in upselling transactions receive the same
information and protections as consumers in other telemarketing
transactions subject to the Rule.
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\165\ Specifically, the Commission proposed amending the
definition to mean ``any telephone call to induce the purchase of
goods or services or to solicit a charitable contribution, when such
telephone call: (1) is initiated by a telemarketer; (2) is
transferred to a telemarketer other than the original telemarketer;
or (3) involves a single telemarketer soliciting on behalf of more
than one seller or charitable organization.'' Proposed Rule Sec.
310.2(t), 67 FR at 4541.
\166\ See, e.g., AmEx-NPRM at 6 (``We agree with the Commission
that the disclosure requirements of the TSR should apply whenever a
new offer is made to the consumer, whether by the original
telemarketer or a telemarketer to whom a call is transferred.
Consumers should always be informed of material terms and conditions
before they purchase a product.''); ERA-NPRM at 8, 11 (``The ERA is
cognizant of the fact that the practice of upselling has increased
dramatically since the Rule was originally promulgated in 1995. . .
. The ERA acknowledges the Commission's desire to include upsells
within the ambit of the Rule and supports the position that, in
instances where solicitations are made during a single telephone
call on behalf of multiple unaffiliated entities, there should be a
clear disclosure. . . .''); ERA-Supp. at 6; LSAP-NPRM at 6; NAAG-
NPRM at 36; NCL-NPRM at 3; PMA-NPRM at 4, 8 (``PMA acknowledges that
the practice of marketing products and services via upsell offers
has increased in recent years and that the existing TSR does not
provide express guidance regarding responsible marketing practices
via the upsell channel.''); June 2002 Tr. II at 213-15, 249-50. But
see CCC-NPRM at 15-16; CMC-NPRM at 7; Household Auto-NPRM at 3;
Keycorp-NPRM at 5-6; Noble-NPRM at 3; NATN-NPRM at 3-4; NSDI-NPRM at
4; PCIC-NPRM at 1-2; Technion-NPRM at 5.
\167\ AmEx-NPRM at 6; ARDA-NPRM at 4; DMA-NPRM at 38; ERA-NPRM
at 8, 12; Household Auto-NPRM at 3; ICT-NPRM at 2; E-Commerce
Coalition-NPRM at 2; NCTA-NPRM at 14; PMA-NPRM at 8-10; SIIA-NPRM at
3; Time-NPRM at 9; June 2002 Tr. II at 213-14.
\168\ See, e.g., ERA-NPRM at 14-15; ERA-Supp. at 6; PMA-NPRM at
8-10.
\169\ ARDA-NPRM at 4; Cox-NPRM at 36; Discover-NPRM at 5; Eagle
Bank-NPRM AT 4; NCL-NPRM at 3.
\170\ ABA-NPRM at 4-5; AFSA-NPRM at 15; ARDA-NPRM at 4; CCC-NPRM
at 13; DMA-NPRM at 38; Eagle Bank-NPRM at 4; NCTA-NPRM at 14; PMA-
NPRM at 10; SIIA-NPRM at 3; Time-NPRM at 10. The ``do-not-call''
provision is found at proposed and amended Rules Sec.
310.4(b)(1)(iii), while the calling time restrictions are at
proposed and amended Rules Sec. 310.4(c).
\171\ June 2002 Tr. II at 213-15.
\172\ See 67 FR at 4500.
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Based upon the comments received during the rulemaking period and
the Commission's law enforcement experience, the Commission has taken a
two-fold approach to upselling in the amended Rule. The Commission has
added a definition of ``upselling,'' which, in combination with certain
amendments to Sec. Sec. 310.4(d) and 310.6 of the Rule,\173\ provides
important protections to consumers who, after completing one
transaction, are offered goods or services in an additional
telemarketing transaction during the same telephone call.\174\ By
including the definition, the Commission intends to clarify that
upsells are subject to all of the Rule's requirements except the ``do-
not-call'' and calling time restrictions in Sec. Sec. 310.4(b)(1)(iii)
and 310.4(c).\175\ With this definitional shift, the ``do-not-call''
regime no longer applies to upsells, since the ``do-not-call''
provisions specifically prohibit ``initiating outbound telephone
calls'' to anyone who has placed their telephone numbers on a company-
specific ``do-not-call'' list or on the FTC's ``do-not-call''
registry.\176\ Second, the amended Rule expressly excludes upsell
transactions from the exemptions in Sec. Sec. 310.6(b)(4), (5) and
(6)--i.e., where the initial transaction is exempted from the Rule
because the call was initiated by the consumer unilaterally or because
it was initiated in response to a direct mail solicitation or general
media advertisement.\177\
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\173\ Section 310.4(d) now includes the phrase ``or internal or
external upsell'' after ``outbound telephone call'' to clearly state
that the basic disclosure requirements of that provision--the
identity of the seller, that the purpose of the call is to sell
goods or services, the nature of the goods or services, and
disclosures related to prize promotions--must be made in any upsell
associated with an initial telephone transaction. Sections
310.6(b)(4), (5) and (6) have been amended to expressly exclude
upsells from these exemptions.
\174\ The provisions relating to ``upselling'' address the
practices which the Commission had proposed to address in the NPRM
through modification of the definition of ``outbound telephone
call.'' Because the amended Rule addresses the practice of
``upselling'' in a different manner, the amended Rule retains
unchanged the wording in the original Rule for the definition of
``outbound telephone call'' (now expanded to cover calls to induce
charitable contributions, pursuant to the USA PATRIOT Act). See
Sec. 310.2(u) of the amended Rule.
\175\ In the NPRM, the Commission noted that in addition to the
disclosure requirements of Sec. 310.4(d) (and the proposed
disclosures of Sec. 310.4(e)), the disclosures in Sec.
310.3(a)(1):
``would, of course, also have to be made by each telemarketer.
In fact . . . the Commission believes that [in any upsell] it is
necessary for this transaction to be treated as separate for the
purposes of complying with the TSR. Therefore, in such an instance,
the telemarketer should take care to ensure that the customer/donor
is provided with the necessary disclosures for the primary
solicitation, as well as any further solicitation. Similarly,
express verifiable authorization for each solicitation, when
required, would be necessary. Of course, even absent the Rule's
requirement to obtain express verifiable authorization,
telemarketers must always take care to ensure that the consumer's or
donor's explicit consent to the purchase or contribution is
obtained.''
67 FR at 4500, n.71.
\176\ See Sec. 310.4(b)(1)(iii).
\177\ Treating upsells as ``outbound telephone calls'' meant
that they were implicitly not covered by any of these exemptions
(which all involve inbound telephone calls of one sort or another).
Creating a separate definition for ``upselling'' requires that the
Commission explicitly address which of the exemptions in Sec. 310.6
of the Rule do not apply to upselling.
---------------------------------------------------------------------------
The definition of ``upselling'' encompasses any solicitation for
goods or services that follows an initial transaction of any sort in a
single telephone call. Thus, both solicitations made by or on behalf of
the same seller involved in the initial transaction, and those made by
or on behalf of a different seller are considered upsells, and both
types of transactions are covered by the Rule.\178\ The term ``initial
transaction'' is intended to describe any sort of exchange between a
consumer and a seller or telemarketer, including but not limited to
sales offers, customer service calls initiated by either the seller or
telemarketer or the consumer, consumer inquiries, or responses to
general media advertisements or direct mail solicitations. The upsell
is defined as a ``separate telemarketing transaction, not a
continuation of the initial transaction'' to emphasize that an upsell
is to be treated as a new telemarketing call, independently requiring
adherence to all relevant provisions of the Rule.\179\
---------------------------------------------------------------------------
\178\ In the NPRM, the Commission focused its analysis of
upselling on whether there were one or two telemarketers or sellers
involved in the upsell transaction. After reviewing the record in
this matter, the Commission believes that the salient distinction is
whether a separate offer is made in the course of a single telephone
call.
\179\ This definition also addresses the concerns of some
telemarketers that simply transferring a consumer-initiated call to
the individual most qualified to address the consumer's inquiry
would trigger the application of the Rule to that otherwise exempt
transaction. See, e.g., CMC-NPRM at 7-8; Cox-NPRM at 35; Eagle Bank-
NPRM at 4; HSBC-NPRM at 2. Instead of focusing on the transfer of a
call, the definition of ``upselling'' centers on the instigation of
an offer for sale of goods or services subsequent to an initial
transaction. Thus, where a consumer calls a company, makes an
inquiry, and is immediately transferred in direct response to that
inquiry, that transfer would not fall within the definition of
``upselling'' and would not be subject to the Rule.
---------------------------------------------------------------------------
Upselling occurs in a wide variety of circumstances--as an addendum
to a customer service call, or after an initial
[[Page 4597]]
offer of goods or services via an inbound or outbound telephone call,
for example.\180\ The upsell can be made by or on behalf of the same
seller involved in the initial transaction (``internal upsell''), or a
different seller (``external upsell'').\181\ Commenters argue that
upsell transactions provide benefits to both sellers and consumers.
According to some industry commenters, sellers can reduce costs
associated with telemarketing by linking transactions together in a
single call,\182\ and are more likely to make successful sales to
consumers already predisposed to the transaction.\183\ Consumers can
benefit from the convenience of such transactions, and from receiving
more targeted marketing offers.\184\ Industry commenters also suggested
that sellers' reduced costs in such transactions are passed along as
savings to consumers.\185\
---------------------------------------------------------------------------
\180\ See, e.g., NAAG-NPRM at 33 (``The upsell can follow either
a sales call or a call related to customer service, such as a call
about an account payment or product repair. . . . Some examples are
the upsell of membership programs, magazines and the like or a
television solicitation to buy an inexpensive lighting product that
includes an upsell of a costly membership program, consumers sold a
membership program when attempting to purchase United States flags
following the September 11, 2001, tragedy, or tickets to
entertainment events.'') (citations omitted). Industry commenters
emphasized the prevalence of upselling in the inbound call context
generally. See, e.g., CCC-NPRM at 12; ERA-NPRM at 11-12; PMA-NPRM at
9-10.
\181\ The NPRM described these forms of upselling as
``internal'' and ``external.'' 67 FR at 4496. Some commenters, such
as ERA, noted that the industry refers to multiple offers by a
single seller--what the Commission calls an ``internal upsell''--as
a ``cross sell,'' and to multiple offers by separate sellers--what
the Commission calls an ``external upsell''--as an ``upsell.'' ERA-
NPRM at 9, n.3. The Commission's approach, however, does not appear
to have caused any confusion in the industry, or on the consumer
side. So, for the sake of consistency both within the rulemaking
process and with existing law enforcement cases, the Commission has
decided to retain these terms as originally proposed.
\182\ See, e.g., PMA-NPRM at 9.
\183\ CCC determined that 14 billion inbound calls are made per
year, of which 40 percent have an upsell associated with them. June
2002 Tr. II at 218. ERA estimated, based on a 12 percent conversion
rate, that approximately $1.5 billion in sales are generated through
inbound upsells alone each year. ERA-NPRM at 11. Aegis estimated the
conversion rate for consumers accepting upsell offers at between 25
and 30 percent. Aegis-NPRM at 4.
\184\ DMA-NPRM at 40; PMA-NPRM at 10; SIIA-NPRM at 3.
\185\ ERA-NPRM at 12; PMA-NPRM at 10; SIIA-NPRM at 3.
---------------------------------------------------------------------------
Despite these benefits, upsells are no less vulnerable to abuse
than other telemarketing practices, and provide the potential for harm
to consumers. Some industry commenters argued that this is not the
case, suggesting that, particularly when the call is initiated by the
consumer: ``The consumer calling a business voluntarily puts herself in
a business environment and knows that she is doing so. It should come
as no surprise to the consumer if, once in that environment, she is
solicited for products and services provided by affiliates or partners
of the business . . . .''\186\
---------------------------------------------------------------------------
\186\ CMC-NPRM at 9. See also Citigroup-NPRM at 6-7; Fleet-NPRM
at 5; Household Auto-NPRM at 4.
---------------------------------------------------------------------------
According to NCL, however, ``[c]omplaints to the NFIC [National
Fraud Information Center] indicate that abuses can occur when consumers
who respond to an advertisement for one thing are then solicited for
something else, especially if the new offer is significantly different
than the original one or is from another vendor. In these situations,
the only information that consumers have on which to decide whether to
make a purchase or donation is that which is provided during the
call.''\187\ In other words, in any upsell, the seller or telemarketer
initiates the offer; it is not the consumer who solicits or requests
the transaction. This means that the consumer is hearing the terms of
that upsell offer for the first time on the telephone. The consumer has
not had an opportunity to review and consider the terms of the offer in
a direct mail piece, or to view an advertisement and gather information
on pricing or quality of the particular good or service before
determining to make the purchase. This makes an upsell very much akin
to an outbound telephone call from the consumer's perspective, even
when the seller is someone with whom the consumer is familiar. Thus, as
NCL noted, every consumer needs ``the same basic disclosures about who
they're dealing with, what they're buying and the terms and conditions
[of the offer]'' regardless of the nature of the telephone sale.\188\
The disclosure provisions of Sec. Sec. 310.3(a) and 310.4(d) were
designed to ensure that consumers know they are being offered goods or
services for sale, and receive all information material to their
decision to accept an offer before they pay for the purchase.
---------------------------------------------------------------------------
\187\ NCL-NPRM at 3. Accord ERA-NPRM at 11 (``The ERA is . . .
aware of the fact that there have been some marketers who have
engaged in unscrupulous marketing practices in soliciting purchases
via upsells, particularly when such upsells involve a free trial
offer and/or other advance consent marketing technique.'').
\188\ June 2002 Tr. II at 221-22.
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Moreover, it should be noted that the introductory paragraphs of
Sec. Sec. 310.3(a), 310.4(a) and 310.5 do not distinguish between
types of telemarketing transactions.\189\ The Rule is clear that its
requirements and prohibitions apply to all sellers and telemarketers
that are subject to the Commission's jurisdiction. Thus, a seller or
telemarketer subject to the Rule must abide by the requirements of
these sections, regardless of whether they are engaged in an initial
telemarketing transaction or in an upsell transaction. Indeed, the
Commission assumes that, where the initial transaction is subject to
the Rule, most sellers and telemarketers treat the upsell as subject to
the Rule as well, and comply with the Rule's requirements in both
segments of the telephone call.\190\
---------------------------------------------------------------------------
\189\ Section 310.3(a) states ``it is a deceptive telemarketing
act or practice and a violation of this Rule for any seller or
telemarketer to engage in the following conduct.'' (emphasis added).
Similarly, Sec. 310.4(a) states ``it is an abusive telemarketing
act or practice and a violation of this Rule for any seller or
telemarketer to engage in the following conduct.'' (emphasis added).
Section 310.5(a) states ``any seller or telemarketer shall keep, for
a period of 24 months from the date the record is produced, the
following records relating to its telemarketing activities.''
\190\ The record suggests, however, that the opposite is true
when upsells are appended to calls that are otherwise exempt from
the Rule. In these instances, the upsells have been treated as part
of the exempt telemarketing transaction and, thus, consumers are not
receiving the protections the Rule requires when a consumer receives
an outbound telephone call, despite the fact that upsells are
similar to outbound calls from the consumer's perspective. See,
e.g., PCIC-NPRM at 1-2. The Commission believes that the protections
provided a consumer in an upsell should be the same as the
protections accorded to consumers receiving an outbound telephone
call, regardless of whether the upsell is appended to an exempt
telemarketing transaction or to a transaction subject to the Rule.
As noted above, consumer advocates and the FTC's law enforcement
experience confirm that upselling can be equally or more
problematic, and thus sellers and telemarketers engaged in upselling
should be required to provide the basic disclosures mandated by the
Rule. In addition, there is no evidence to suggest that upsells
should not be subject to any other part of the Rule (other than the
``do-not-call'' and calling time restrictions).
---------------------------------------------------------------------------
The Commission also finds that consumers should have the Rule's
billing protections in each of these transactions. CCC suggested that,
at least in inbound calls that include upsells, consumers have ``the
highest level of consumer protection because the consumer is
specifically asked and consents to the additional goods or services
being charged to the same billing source the consumer provided and/or
accessed just moments before.''\191\ However, the Commission's and
states' law enforcement experience does not support CCC's assertion
that, by giving consent to the use of an account number in an initial
transaction, the consumer in an upsell is afforded protection from
deception or unauthorized billing.\192\
---------------------------------------------------------------------------
\191\ CCC-NPRM at 12.
\192\ Indeed, law enforcement experience indicates that the fact
that the consumer has already provided or authorized use of his or
her billing information in an initial transaction may actually
result in greater risk of abuse during the second transaction. For
example, in actions by the FTC and several states against Triad
Discount Buying Service, Inc., and related entities, the Commission
and the states alleged that the defendants crafted a marketing
campaign designed to lure consumers to call solely for the purpose
of upselling them. See FTC v. Smolev, No. 01-8922-CIV ZLOCH (S.D.
Fla. 2001). Specifically, the Commission and states alleged that the
defendants ran an advertising campaign for a free product, inviting
consumers to call a toll-free number. When they called, consumers
were asked to provide account information to pay for shipping and
handling for the free product, and then were upsold a ``free trial''
in a membership club or buyers club, that was then charged, without
the consumer's knowledge or consent, to the account provided by the
consumer to pay for the shipping of the first product. See also
NAAG-NPRM at 30, n.73 (citing, among others such cases, Illinois v.
Blitz Media, Inc. (Sangamon County, No. 2001-CH-592) and New York v.
Ticketmaster and Time, Inc., (Assurance of Discontinuance)).
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[[Page 4598]]
Other recommendations
Limitations to the definition of ``upselling.'' Some commenters
suggested that the definition of ``upselling'' be limited to ``external
upselling'' transactions (i.e., where there are two different sellers
in the two transactions).\193\ They argued that any requirements that
the Commission might apply to ``upselling'' should not include upsells
made by or on behalf of the same seller.\194\ However, the Commission
believes that law enforcement experience indicates that ``internal
upsells'' (where both transactions are by or on behalf of the same
seller) have as much potential for deception and abuse as other types
of telemarketing transactions that are subject to the Rule's
requirements.\195\ Therefore, the Commission has not adopted this
suggestion.
---------------------------------------------------------------------------
\193\ ERA-NPRM at 9; NCTA-NPRM at 14.
\194\ Id.
\195\ See NAAG-NPRM at 30, n.73, citing cases involving internal
upsells, including but not limited to Illinois v. Blitz Media, Inc.
(Sangamon County, Case No. 2001-CH-592); Triad Discount Buying
Serv., Inc. [a/k/a Smolev] and related entities; and Minnesota v.
Fleet Mortgage Corp., 158 F. Supp. 2d 962 (D. Minn. 2001).
---------------------------------------------------------------------------
Other commenters argued that the definition of ``upselling'' should
not include upsells by ``affiliates.''\196\ Still others made more
specific requests to exempt banks, their affiliates and non-affiliated
third parties who provide services on the banks' behalf or with whom
the banks have joint marketing relationships;\197\ to exempt agents or
affiliates of common carriers;\198\ and to exempt affiliates of
insurance companies.\199\ However, once again, there is scant support
justifying such an approach. On the contrary, the record as a whole and
law enforcement experience indicate that upsells by affiliates and non-
affiliated third parties with whom there is a joint marketing
relationship have as much potential for deception and abuse as other
types of telemarketing transactions that are subject to the Rule's
requirements.\200\
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\196\ ABIA-NPRM at 5; AFSA-NPRM at 15; NFC-NPRM at 6.
\197\ ABIA-NPRM at 5; MBA-NPRM at 3.
\198\ SBC-NPRM at 2, 5, 8.
\199\ PCIC-NPRM at 1-2.
\200\ See NAAG-NPRM at 30, n.73 (``States have taken actions
against companies using preacquired information as part of an upsell
of membership programs or magazines. See note 188. See also New York
v. Ticketmaster and Time, Inc. (Assurance of Discontinuance)'').
---------------------------------------------------------------------------
The Commission has made it very clear that the Rule does not apply
to entities or activities that fall outside the Commission's authority
under the FTC Act, such as banks, savings associations and federal
credit unions; regulated common carriers, and the business of
insurance. However, the Commission has also made it very clear that the
exemption enjoyed by those entities does not extend to any third-party
telemarketers who may make or receive calls on behalf of those exempt
entities. As the Commission stated in the SBP for the original Rule:
The Commission is not aware of any reason why the Final Rule should
create a special exemption for such companies where the FTC Act does
not do so. Accordingly, the Final Rule does not include special
provisions regarding exemptions of parties acting on behalf of
exempt organizations; where such a company would be subject to the
FTC Act, it would be subject to the Final Rule as well.\201\
---------------------------------------------------------------------------
\201\ 60 FR at 43843.
Clarification of ``seller'' in an upsell transaction. ERA and PMA
recommended that the Commission clarify what is meant by ``seller'' in
the context of upselling.\202\ First, ERA and PMA suggested that
``seller'' be construed as the marketer who will submit the charge for
payment against the consumer's account.\203\ As ERA stated:
---------------------------------------------------------------------------
\202\ ERA-NPRM at 9-10; PMA-NPRM at 12-13. See also VISA-NPRM at
9 (requesting clarification of the term in all transactions, not
just those involving upselling).
\203\ ERA-NPRM at 10; PMA-NPRM at 13.
[A] marketer might offer (and bill) a consumer for a product that it
obtains on a wholesale basis from a manufacturer (in many instances,
the marketer may not even take possession of the product, but rather
have the manufacturer ship directly to the purchaser). Both the
marketer and the manufacturer receive consideration in exchange for
providing, or arranging for the other to provide, the product to the
consumer. Thus, both entities are arguably `sellers.' However, only
the marketer will bill the consumer for the sale. As such, there
should be no need to identify both entities to the consumer. In fact
it would likely be confusing to the consumer to do so.\204\
---------------------------------------------------------------------------
\204\ ERA-NPRM at 11.
The Commission has retained in the amended Rule the definition of
``seller,'' which states that a ``seller'' is ``any person who, in
connection with a telemarketing transaction, provides, offers to
provide, or arranges for others to provide goods or services to the
customer in exchange for consideration.''\205\ The Commission believes
that this definition makes clear that, for purposes of the Rule, a
``seller'' is not necessarily the manufacturer of a product, nor the
sole financial beneficiary from its sale. Rather, the definition of
``seller'' is predicated upon a person's provision of goods or
services--whether consummated, merely offered, or even simply
``arranged for''-- to the customer. Therefore, in the case of an
upselling transaction, or, indeed, any telemarketing transaction, the
marketer or other entity who provides, offers to provide, or arranges
for the provision of the goods or services that are the subject of the
offer would be the ``seller'' for purposes of the Rule.
---------------------------------------------------------------------------
\205\ Amended Rule Sec. 310.2(z).
---------------------------------------------------------------------------
Second, both ERA and PMA, as well as a number of other commenters,
suggested that the Commission ``clarify that affiliated entities do not
constitute separate sellers.''\206\ To this end, ERA recommended
looking to the Commission's Privacy of Consumer Financial Information
Rule,\207\ while PMA and NRF suggested using the standard laid out by
the FCC for ``do-not-call'' purposes.\208\ NCL and AARP disagreed. NCL
stated:
---------------------------------------------------------------------------
\206\ ERA-NPRM at 10. See also June 2002 Tr. II at 222 (ATA);
PMA-NPRM at 13; SBC-NPRM at 9.
\207\ The Privacy of Consumer Financial Information Rule, 16 CFR
313.3(a), defines an affiliate as ``any company that controls, is
controlled by or is under common control with another company.''
(quoted in ERA-NPRM at 11).
\208\ The applicable definition in the FCC's regulations is
found at 47 CFR 64.1200(e)(2)(v). PMA-NPRM at 13 (``Thus, we suggest
that corporate affiliates be exempt in those situations where the
consumer would reasonably expect such affiliates to be related to
the original seller.''). See also June 2002 Tr. II at 217-18; and at
226-28 (NRF).
We believe affiliates have to be treated as second sellers. They may
be selling totally different products with different terms and
conditions. Consumers don't have any way of knowing what is an
affiliate of that company and what isn't, and ultimately it doesn't
really matter to them because they need the same basic disclosures
about who they're dealing with, what they're buying and the terms
and conditions, whether it's entirely a different seller or an
affiliate of the original one.\209\
---------------------------------------------------------------------------
\209\ June 2002 Tr. II at 221-22; and at 228 (AARP).
[[Page 4599]]
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The Commission shares this viewpoint. As discussed above, the record in
this matter, as well as law enforcement experience, indicate that
upsells by affiliates and non-affiliated third parties with whom there
is a joint marketing relationship have as much potential for deception
and abuse as other types of telemarketing transactions that are subject
to the Rule's requirements. For that reason, the Commission believes
that affiliates should be treated as separate sellers for purposes of
upsell transactions.
C. Section 310.3 -- Deceptive Telemarketing Acts or Practices.
Section 310.3 of the original Rule sets forth required disclosures
that must be made in every telemarketing call; prohibits
misrepresentations of material information; requires that a
telemarketer obtain a customer's express verifiable authorization
before obtaining or submitting for payment a demand draft; prohibits
false and misleading statements to induce the purchase of goods or
services; holds liable anyone who provides substantial assistance to
another in violating the Rule; and prohibits credit card laundering in
telemarketing transactions.
In the NPRM, the Commission proposed amendments to require that
disclosures made pursuant to this section be made ``truthfully;''
require additional disclosures regarding prize promotions and in the
sale of credit card loss protection plans; prohibit misrepresentations
in the sale of credit card loss protection plans; expand the reach of
the express verifiable authorization provision to include all methods
of payment lacking certain key consumer protections; and make certain
changes pursuant to the USA PATRIOT Act, which extends the coverage of
the Rule to include the inducement of a charitable solicitation.
Based on the record in this proceeding, the Commission has
determined to make additional modifications in the amended Rule. These
changes, and the reasoning supporting the Commission's decisions, are
set forth below.
Sec. 310.3(a)(1) -- Required disclosures
Section 310.3(a)(1) of the original Rule requires the seller or
telemarketer to disclose, in a clear and conspicuous manner, certain
material information before a customer pays for goods or services
offered.\210\ The NPRM proposed to make a minor modification to the
wording, by adding the word ``truthfully'' to clarify that it is not
enough that the disclosures be made; the disclosures must also be true.
The Commission received no comment on this proposed change, and
therefore has determined to retain this additional wording in amended
Sec. 310.3(a)(1).
---------------------------------------------------------------------------
\210\ See ARDA-NPRM at 5 (noting that ARDA members support the
current disclosures required by this section).
---------------------------------------------------------------------------
The few comments that the Commission received on Sec. 310.3(a)(1)
in response to the NPRM focused primarily on the timing of the required
disclosures. AARP argued that, to be meaningful, the disclosures
required by this section must be given before payment is requested, not
merely before it is ``collected.''\211\ According to AARP, ``[s]uch
information is key to making truly informed buying decisions,'' and so
all the necessary disclosures should be given before a consumer is
requested to pay for goods and services.\212\ DOJ commented that the
use of money-transmission services, rather than couriers, is
increasingly popular in fraudulent telemarketing schemes, and
recommended that the Commission amend the current footnote addressing
the meaning of ``before the customer pays'' to state: ``Similarly, when
a seller or telemarketer directs a customer to use a money-transmission
service to wire payment, the seller or telemarketer must make the
disclosures required by Sec. 310.3(a)(1) before directing the customer
to take money to an office or agent of a money-transmission service to
wire payment.''\213\
---------------------------------------------------------------------------
\211\ AARP-NPRM at 8.
\212\ Id.
\213\ DOJ-NPRM at 2.
---------------------------------------------------------------------------
In the SBP for the original Rule, the Commission noted that for a
telemarketer to make the required disclosures ``before a customer
pays,'' the disclosures must be made ``before the consumer sends funds
to a seller or telemarketer or divulges to a telemarketer or seller
credit card or bank account information.''\214\ In the original Rule's
TSR Compliance Guide, the Commission further clarified that the
disclosures required by Sec. 310.3(a)(1) must be made ``[b]efore a
seller or telemarketer obtains a consumer's consent to purchase, or
persuades a consumer to send any full or partial payment. . . .''\215\
The Guide goes on to say that ``[a] seller or telemarketer also must
provide the required information before requesting any credit card,
bank account, or other information that a seller or telemarketer will
or could use to obtain payment.''\216\ The Commission believes that its
statements to date on the meaning of the term ``before the customer
pays'' are sufficiently clear and declines to modify this provision.
---------------------------------------------------------------------------
\214\ 60 FR at 4384.
\215\ TSR Compliance Guide at 11.
\216\ Id.
---------------------------------------------------------------------------
Sec. 310.3(a)(1)(i) -- Disclosure of total costs
Section 310.3(a)(1)(i) of the original Rule requires a seller or
telemarketer to disclose the total costs to purchase, receive, or use
the goods or services. As noted in the TSR Compliance Guide, ``[i]t is
sufficient to disclose the total number of installment payments, and
the amount of each payment, to satisfy this requirement.''\217\ Some
commenters in the Rule Review urged the Commission to require, in sales
involving monthly installment payments, the disclosure of the total
cost of the entire contract, not just the amount of the periodic
installment.\218\ In the NPRM, the Commission declined to modify the
provision, but clarified that ``the disclosure of the number of
installment payments and the amount of each must correlate to the
billing schedule that will actually be implemented. Therefore, to
comply with the Rule's total cost disclosure provision, it would be
inadequate to state the cost per week if the installments are to be
paid monthly or quarterly.''\219\ The NPRM further noted that the best
practice to ensure compliance with the clear and conspicuous standard
governing all the Sec. 310.3(a)(1) disclosures is to ``do the math''
for the consumer, stating the total cost of the contract whenever
possible.\220\ The Commission acknowledged that such a statement might
not be possible in an open-ended installment contract, and stated that
in such contracts, ``particular care must be taken to ensure that the
cost disclosure is easy for the consumer to understand.''\221\
---------------------------------------------------------------------------
\217\ Id. at 12.
\218\ See 67 FR at 4502.
\219\ Id.
\220\ Id.
\221\ Id. at n.92.
---------------------------------------------------------------------------
In response to the NPRM, the Commission again received some
comments urging that the Commission affirmatively mandate that, in
installment sales contracts, the total cost of the contract be
disclosed, rather than the number and amount of payments.\222\ For
example, LSAP opined that ``it is illogical to maintain a provision
that demands a subjective determination of whether or not a disclosure
meets a `clear and conspicuous' standard when an objective and
unambiguous standard
[[Page 4600]]
can be adopted.''\223\ NACAA suggested that the Commission require
disclosure of the total cost of the contract, noting that consumers do
not always have the time or ability to ``do the math'' during a
telemarketing call.\224\ NCL concurred with LSAP and NACAA, and noted
that since the seller or telemarketer would know the total contract
price in an installment offer, it would impose no undue burden on
industry members to mandate disclosure of the total contract
price.\225\
---------------------------------------------------------------------------
\222\ See, e.g., LSAP-NPRM at 6-8; NACAA-NPRM at 7-8; NCL-NPRM
at 3-4; NCLC-NPRM at 13.
\223\ LSAP-NPRM at 7.
\224\ NACAA-NPRM at 7-8 (citing, as an example of the harm that
would persist absent such a provision, the sale of purportedly
``free'' magazines, for which consumers are billed exorbitant
``shipping and handling'' fees).
\225\ NCL-NPRM at 3-4.
---------------------------------------------------------------------------
The Commission declines to adopt the recommendations to modify the
total cost disclosure provision. The Commission believes that its
interpretation, set forth in the NPRM, allows sellers and telemarketers
the flexibility necessary to make a truthful and meaningful disclosure
when goods or services are offered in conjunction with an open-ended
installment agreement. The Commission's interpretation makes clear,
however, that, at a minimum, the total number of payments and the
amount of each must be clearly and conspicuously disclosed in order to
satisfy the requirements of Sec. 310.3(a)(1)(i). Although the
Commission continues to believe that the best practice is for the
telemarketer or seller to disclose the full amount of payments under of
the contract whenever possible, it declines to impose such a
requirement, which would be unworkable in the context of open-ended
contracts, such as negative option plans.\226\
---------------------------------------------------------------------------
\226\ See 60 FR at 43846 (noting that the total cost of a
contract cannot be ascertained in negative option or continuity
plans).
---------------------------------------------------------------------------
The Commission also declines to adopt the recommendation that the
Commission explicitly state that for electricity sales, it is
permissible to disclose the price per kilowatt hour.\227\ The
Commission recognizes that a vast number of goods and services can be
sold through telemarketing, and believes it unnecessary to specify, for
each, the specific terms that must be disclosed. Rather, the Commission
believes that the language of Sec. 310.3(a)(1)(i), which requires that
the disclosure of total costs (among others) be made ``truthfully, and
in a clear and conspicuous manner,'' provides sufficient guidance for
sellers who must make these disclosures, without necessitating explicit
approval from the Commission for each of the myriad variations of
``total cost'' disclosures for the many kinds of goods and services
sold through telemarketing. Therefore, Sec. 310.3(a)(1)(i) is retained
unchanged in the amended Rule.
---------------------------------------------------------------------------
\227\ See Green Mountain-NPRM at 7.
---------------------------------------------------------------------------
Sec. 310.3(a)(1)(ii) -- Disclosure of material restrictions
Section 310.3(a)(1)(ii) requires the disclosure of ``[a]ll material
restrictions, limitations, or conditions to purchase, receive, or use
the goods or services that are the subject of the sales offer.'' In
response to the Rule Review, NAAG recommended that this provision
explicitly state that the illegality of the goods or services offered
is a material term. NAAG's concern arose out of the numerous cross-
border foreign lottery scams in which U.S. citizens are offered the
sale of foreign lottery chances.\228\ The Commission declined to modify
the Rule, stating its position that the term ``material'' is
``sufficiently clear and broad enough to encompass the illegality of
goods or services offered.''\229\
---------------------------------------------------------------------------
\228\ 67 FR at 4502-03.
\229\ Id. at 4503.
---------------------------------------------------------------------------
In response to the NPRM, DOJ supported NAAG's reasoning, and
recommended that the Commission add to Sec. 310.3(a)(1)(ii) ``a
specific and unambiguous reference to the illegality of goods and
services that the seller or telemarketer is offering,'' noting that
such an amendment would enhance law enforcement and consumer education
efforts regarding foreign lottery scams.\230\ The Commission remains
confident that the breadth of the term ``material,'' as used in the
Rule, would necessarily encompass the underlying illegality of goods or
services offered in telemarketing.\231\ Therefore, the Commission
declines to modify the language in this provision and the amended Rule
retains unchanged the original text of Sec. 310.3(a)(1)(ii).
---------------------------------------------------------------------------
\230\ DOJ-NPRM at 3.
\231\ As the Commission noted in the NPRM, the definition of
``material'' under the Rule comports with the Commission's Deception
Statement and established Commission precedent. See 67 FR at 4503.
---------------------------------------------------------------------------
Sec. 310.3(a)(1)(iv) -- Disclosures regarding prize promotions
Section 310.3(a)(1)(iv) requires that, in any prize promotion, a
telemarketer must disclose, before a customer pays, the odds of being
able to receive the prize, that no purchase or payment is required to
win a prize or participate in a prize promotion, and the no-purchase/
no-payment method of participating in the prize promotion. In the NPRM,
the Commission proposed adding a disclosure that making a purchase will
not improve a customer's chances of winning,\232\ which would make the
TSR's disclosure provision consistent with the requirements for direct
mail solicitations under the Deceptive Mail Prevention and Enforcement
Act of 1999 (``DMPEA'').\233\ After reviewing the record in this
matter, the Commission has determined to amend the Rule by adding this
disclosure requirement to two provisions: in Sec. 310.3(a)(1)
(governing all telemarketing calls), and in Sec. 310.4(d) (governing
outbound telemarketing).\234\
---------------------------------------------------------------------------
\232\ 67 FR at 4503. Although NCL originally made this
suggestion with respect to Sec. 310.4(d), which governs oral
disclosures required in outbound telemarketing calls, the rationale
and purpose of the proposed disclosure applies with equal force to
all telemarketing, as covered by Sec. 310.3(a). See NCL-RR at 9.
See also the discussion below in the section on sweepstakes
disclosures within the analysis of Sec. 310.4(d).
\233\ 67 FR at 4503. The DMPEA is codified at 39 U.S.C.
3001(k)(3)(A)(II). See also ``The DMA Guidelines for Ethical
Business Practice,'' revised Aug. 1999, at http://www.the-dma.org/library/guidelines/dotherightthing.shtml
23 (Article
23, Chances of Winning). In this regard, it is noteworthy
that the DMA's Code of Ethics advises that ``[n]o sweepstakes
promotion, or any of its parts, should represent . . . that any
entry stands a greater chance of winning a prize than any other
entry when this is not the case.''
\234\ See discussion below regarding the disclosure in Sec.
310.4(d).
---------------------------------------------------------------------------
As noted in the NPRM, the Commission believes that this disclosure
will prevent consumer deception. The legislative history of the DMPEA
suggests that without such a disclosure, many consumers reasonably
interpret the overall presentation of many prize promotions to convey
the message that making a purchase will enhance their chances of
winning the touted prize.\235\ Such a message is likely
[[Page 4601]]
to influence these consumers' purchasing decisions, inducing them to
purchase a product or service they otherwise would not purchase just so
they can increase their chances of winning. For this reason, the
Commission believes that entities using these promotions must disclose
that a purchase will not enhance the chance of winning, to ensure that
consumers are not deceived.
---------------------------------------------------------------------------
\235\ See SEN. REP. NO. 106-102 (1999); and H. REP. NO. 106-431
(1999). Law enforcement actions since enactment of DMPEA further
support this conclusion. For example, Publishers Clearing House
(``PCH'') agreed to settle an action brought by 24 states and the
District of Columbia alleging, among other things, that the PCH
sweepstakes mailings deceived consumers into believing that their
chances of winning the sweepstakes would be improved by buying
magazines from PCH. As part of the settlement, PCH agreed to include
disclaimers in its mailings stating that buying does not increase
the consumer's chances of winning, and pay $18.4 million in redress.
In 2001, PCH agreed to pay $34 million in a settlement with the
remaining 26 states. See, e.g., Missouri ex rel. Nixon v. Publishers
Clearing House, Boone County Circuit Ct., No. 99 CC 084409 (2002);
Ohio ex rel. Montgomery v. Publishers Clearing House, Franklin
County Ct. of Common Pleas, No. 00CVH-01-635 (2001 ). Similarly, in
1999, American Family Publishers (``AFP'') settled several multi-
state class actions that alleged the AFP sweepstakes mailings
induced consumers to buy magazines to better their chances of
winning a sweepstakes. The original suit, filed by 27 states, was
settled in March 1998 for $1.5 million, but was reopened and
expanded to 48 states and the District of Columbia after claims that
AFP had violated its agreement. The state action was finally settled
in August 2000 with AFP agreeing to pay an additional $8.1 million
in damages. See, e.g., Washington v. Am. Family Publishers, King
County Super. Ct., No. 99-09354-2 SEA (2000).
---------------------------------------------------------------------------
Commenters who addressed this proposal generally were supportive of
adding the disclosure.\236\ NAAG supported the additional disclosure,
but asked the Commission to go further. First, NAAG suggested that any
telemarketer using a prize promotion should be required to disclose the
actual or estimated odds--not simply how the odds might be
calculated.\237\ Second, NAAG recommended that the original Rule's
definition of ``prize''\238\ be made consistent with state laws and
regulations, and the several multi-state settlements with large
promotional sweepstakes companies.\239\ Third, they recommended that
the Commission track provisions in the recent settlements between the
states and PCH, which would ensure that the means by which a consumer
might enter a sweepstakes without making a purchase is not more
difficult than if a purchase were made.\240\ Each of these suggestions
is discussed below.
---------------------------------------------------------------------------
\236\ ARDA-NPRM at 5; NAAG-NPRM at 54-55; NACAA-NPRM at 6-7;
NCL-NPRM at 4; DOJ-NPRM at 3-4. See also June 2002 Tr. II at 105-15.
\237\ NAAG-NPRM at 54. NACAA also recommended that the
Commission require more specificity in the disclosure regarding the
odds. NACAA-NPRM at 6-7; and discussion regarding the disclosure of
odds, June 2002 Tr. II at 113-15. DOJ recommended that the
Commission include a brief explanation in the Rule or in a footnote
of what is meant by the phrase ``the odds of being able to receive a
prize,'' and clarify that the disclosure must give the odds for each
prize. DOJ-NPRM at 3-4.
\238\ Original Rule Sec. 310.2(v).
\239\ NAAG-NPRM at 54. NAAG recommended that ``prize'' be
defined to be an item of value and that it not be an item that
substantially all entrants in the promotion will receive.
\240\ Id. at 54-55.
---------------------------------------------------------------------------
As noted in the SBP for the original Rule, the Commission continues
to believe that, in many instances, actual odds cannot be calculated in
advance. In such circumstances, the Commission believes that requiring
prize promoters to disclose ``estimated'' odds has greater potential
for abuse than a disclosure of the method used to calculate those
odds.\241\ Furthermore, in many instances, such a requirement to
disclose odds would reveal that virtually every entrant gets a
``prize.'' The Commission believes that the better course is to require
prize promoters to disclose the method by which odds are calculated.
With regard to the suggestions to revise the definition of ``prize''
and the ease of entry for non-purchasers, the record provides no
evidence on why the difference between a ``prize'' and a ``free gift''
would be material to consumers. The Commission believes that its
authority to reach deceptive or unfair acts or practices under the FTC
Act has been sufficient to address any deceptive prize promotions that
have not been reachable under the Rule.\242\ The Commission's
requirements regarding prize promotion disclosures are not inconsistent
and do not conflict with the more restrictive state laws. Therefore,
the Commission declines to adopt NAAG's recommendations.
---------------------------------------------------------------------------
\241\ Ironically, requiring accurate disclosure of the odds of
winning also is likely to subject some sellers and telemarketers to
liability under the Rule for activity that does not cause consumer
injury, since it is hard to imagine what harm is caused to consumers
by underestimating the odds of winning.
\242\ See, e.g., FTC v. Landers, No. 100-CV-1582 (N.D. Ga. filed
June 22, 2000); New World Bank Servs., Inc., No. CV-00-07225-GHK
(C.D. Cal. filed July 5, 2001); Global Network Enters., Inc., No.
00-625 (GET) (ANX) (C.D. Cal. 2001).
---------------------------------------------------------------------------
PMA maintained that the disclosure that making a purchase would not
improve a customer's chances of winning was unnecessary and that there
was no evidence on the record to support its addition to the Rule.\243\
They suggested that the disclosure makes sense in the context of direct
mail, but not in the types of representations more often found in
telemarketing.\244\ Nonetheless, the PMA stated that, as a gesture of
good faith, they would not oppose the change.\245\
---------------------------------------------------------------------------
\243\ PMA-NPRM at 4-8.
\244\ Id. See also June 2002 Tr. II at 104-05.
\245\ PMA-NPRM at 5, 7. See also June 2002 Tr. II at 106, 108
(PMA and ARDA, each stating that they do not oppose the disclosure).
ARDA stated in its comment that, while it is inconvenient to include
additional verbiage in a telephone call, it did not find the
additional disclosure unduly burdensome. ARDA-NPRM at 5.
---------------------------------------------------------------------------
Therefore, the Commission has determined that it is a deceptive
telemarketing act or practice to fail to disclose before the customer
pays, in any prize promotion, the odds of being able to receive the
prize, that no purchase or payment is required to win a prize or
participate in a prize promotion, that any purchase or payment will not
increase the person's chances of winning, and the no-purchase/no-
payment method of participating in the prize promotion.
Sec. 310.3(a)(1)(v) -- Required disclosure of material costs in prize
promotions
NACAA expressed concern that original and proposed Rule Sec.
310.3(a)(1)(v) requires that a prize promoter disclose to consumers all
``material costs or conditions to receive or redeem a prize that is the
subject of the prize promotion'' when there should be no costs to
receive a prize.\246\ NACAA suggests removing the ``material costs''
portion of subsection (v). The Commission agrees that there should be
no costs to receive or redeem a prize. In fact, Sec. 310.3(a)(1)(iv)
requires a disclosure that ``no purchase or payment is required to win
a prize or to participate in a prize promotion.'' Moreover, Sec.
310.3(a)(2)(v) prohibits misrepresentations ``that a purchase or
payment is required to win a prize or participate in a prize
promotion.'' Thus the Rule is unequivocal in forbidding conditioning a
``prize'' on a payment or purchase. Section 310.3(a)(1)(v) is intended
to further clarify that any incidental cost that a consumer must
incur-- not merely a purchase or payment--must be disclosed in advance
to avoid deception and to comply with the Rule. Despite NACAA's
comment, the Commission does not believe there is any confusion
regarding the role of this provision. Therefore, the Commission has
determined to retain the original wording of this provision.
---------------------------------------------------------------------------
\246\ NACAA-NPRM at 6-7 (pointing out that, if there are costs,
then the ``prize offer'' becomes a sales pitch for add-ons, not a
prize).
---------------------------------------------------------------------------
Sec. 310.3(a)(1)(vi) -- Required disclosures in the sale of credit
card loss protection
The telemarketing of credit card loss protection plans has been a
persistent source of a significant number of complaints about
fraud.\247\ Telemarketers of credit card loss protection plans
represent to consumers that these plans will limit the consumer's
liability if his credit card is lost or stolen.\248\ These
telemarketers frequently misrepresent themselves as being affiliated
with the consumer's credit card issuer, or misrepresent either
affirmatively or by omission that the consumer is not currently
protected against credit card fraud, or that the consumer has greater
potential legal liability for unauthorized use of his or her credit
cards than he or she actually
[[Page 4602]]
does under the law.\249\ In fact, federal law limits this liability to
no more than $50.\250\
---------------------------------------------------------------------------
\247\ See, e.g., NCL-NPRM at 6.
\248\ Credit card loss protection plans are distinguished from
credit card registration plans, in which consumers pay a fee to
register their credit cards with a central party, who agrees to
contact the consumers' credit card companies if the consumers' cards
are lost or stolen.
\249\ NCL-RR at 10. See, e.g., FTC v. Universal Mktg. Servs.,
Inc., No. CIV-00-1084L (W.D. Okla. filed June 20, 2000); FTC v. NCCP
Ltd., No. 99 CV-0501 A(Sc) (W.D.N.Y. filed July 22, 1999); S. Fla.
Bus. Ventures, No. 99-1196-CIV-T-17F (M.D. Fla. filed May 24, 1999);
Tracker Corp. of Am., No. 1:97-CV-2654-JEC (N.D. Ga. filed Sept. 11,
1997).
\250\ Under Sec. 133 of the Consumer Credit Protection Act, the
consumer's liability for unauthorized charges is limited to $50 when
there is a signature involved. For transactions where no signature
was involved (e.g., where the transaction did not take place face-
to-face), the consumer has zero liability for unauthorized charges.
15 U.S.C. 1643.
---------------------------------------------------------------------------
In the NPRM, the Commission proposed two new provisions to address
this practice. The first provision--Sec. 310.3(a)(1)(vi)--requires the
seller or telemarketer of credit card loss protection plans to
disclose, before the customer pays, the limit, pursuant to 15 U.S.C.
Sec. 1643, on a cardholder's liability for unauthorized use of a
credit card. Since many consumers appear to be unaware of the
protection they have, the Commission reasoned that a disclosure of the
limits of their liability would deter many consumers from paying for
protection that duplicates the free protection they already have under
federal law. The second provision--Sec. 310.3(a)(2)(viii)--prohibits
sellers or telemarketers from misrepresenting that any customer needs
offered goods or services to provide protections a customer already has
pursuant to 15 U.S.C. Sec. 1643.\251\
---------------------------------------------------------------------------
\251\ This approach parallels the Rule's treatment of cost and
quantity of goods (Sec. Sec. 310.3(a)(1)(i) and 310.3(a)(2)(i)),
material restrictions, limitations, or conditions (Sec. Sec.
310.3(a)(1)(ii) and 310.3(a)(2)(ii)), refund policy (Sec. Sec.
310.3(a)(1)(iii) and 310.3(a)(2)(iv)), and prize promotions
(Sec. Sec. 310.3(a)(1)(iv) & (v) and 310.3(a)(2)(v)). In each case,
material facts must be disclosed, and misrepresentations of those
facts are prohibited. See additional discussion below regarding
Sec. 310.3(a)(2)(viii).
---------------------------------------------------------------------------
The Commission received little comment on these proposed
provisions. Those commenters who addressed the disclosure provision
strongly supported it, noting that complaints about the fraudulent sale
of credit card loss protection plans have continued unabated since the
original Rule became effective.\252\ In its NPRM comment, NCL reported
that fraudulent solicitations for credit card loss protection plans
ranked eighth among the most numerous complaints to the NFIC in
2001.\253\ The Commission's complaint-handling experience is consistent
with that of NCL, with credit card loss protection plans continuing to
be a source of consumer complaints. In its comment, NCL pointed out
that fraud in the sale of credit card protection plans is particularly
pernicious because it usually involves blatant misrepresentations and
scare tactics about consumers' liability for lost or stolen credit
cards.\254\ Furthermore, the fraud is especially egregious because
these schemes appear disproportionately to affect older consumers: in
2001, NCL reported, 55 percent of the victims of credit card loss
protection plans were age 60 or older, while that age group accounted
for only 26 percent of telemarketing fraud victims overall.\255\ As
noted in the NPRM, large numbers of complaints have prompted both the
Commission and the state Attorneys General to devote substantial
resources to bringing cases that challenge the deceptive marketing of
credit card loss protection plans.\256\
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\252\ DOJ-NPRM at 4; LSAP-NPRM at 7-8; NAAG-NPRM at 55; NCL-NPRM
at 6. See also June 2002 Tr. II at 104.
\253\ NCL-NPRM at 6.
\254\ Id.
\255\ Id. In its Rule Review comment, NCL reported that in 1999,
over 71 percent of the complaints about these schemes were from
consumers over 50 years of age. NCL-RR at 10.
\256\ See, e.g., FTC v. Consumer Repair Servs., Inc., No. 00-
11218 (C.D. Cal. filed Oct. 23, 2000); FTC v. Forum Mktg. Servs.,
Inc., No. 00 CV 0905C(F) (W.D.N.Y. filed Oct. 23, 2000); FTC v.
1306506 Ontario, Ltd., No. 00 CV 0906A (SR) (W.D.N.Y. filed Oct. 23,
2000); FTC v. Advanced Consumer Servs., No. 6-00-CV-1410-ORL-28-B
(M.D. Fla. filed Oct. 23, 2000); Capital Card Servs., Inc. No. CIV
00 1993 PHX ECH (D. Ariz. filed Oct. 23, 2000); .FTC v. First
Capital Consumer Membership Servs., Inc., No. 00-CV- 0905C(F)
(W.D.N.Y. filed Oct. 23, 2000); FTC v. Universal Mktg. Servs., Inc.,
No. CIV-00-1084L (W.D. Okla. filed June 20, 2000); FTC v. Liberty
Direct, Inc., No. 99-1637 (D. Ariz. filed Sept. 13, 1999); FTC v.
Source One Publ'ns, Inc., No. 99-1636 PHX RCP (D. Ariz. filed Sept.
14, 1999); FTC v. Creditmart Fin. Strategies, Inc., No. C99-1461
(W.D. Wash. filed Sept. 13, 1999); FTC v. NCCP Ltd., No. 99 CV-0501
A(Sc) (W.D.N.Y. filed July 22, 1999); FTC v. S. Fla. Bus. Ventures,
No. 99-1196-CIV-T-17F (M.D. Fla. filed May 24, 1999); FTC v. Bank
Card Sec. Ctr., Inc., No. 99-212-Civ-Orl-18C (M.D. Fla. filed Feb.
26, 1999); FTC v. Tracker Corp. of Am., No. 1:97-CV-2654-JEC (N.D.
Ga. filed Sept. 11, 1997).
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NCL supported the Commission's decision to require disclosures and
prohibit misrepresentations in the sale of credit card loss protection
plans. However, NCL also recommended that the Commission go further and
mandate requirements similar to those under the Credit Repair
Organizations Act\257\--i.e., written disclosures regarding the
consumer's rights, coupled with a written agreement or an agreement
signed by the buyer who has three days to cancel.\258\ The Commission
believes that disclosures coupled with the prohibition against
misrepresentation are appropriate and sufficient remedies to cure the
problems associated with deceptive sales of credit card loss protection
plans. The likely outcome of enforcement of these remedies is that
consumers will decline to purchase such plans once they know that they
duplicate free protection the law already provides them. The Commission
will continue to monitor complaints regarding the sale of these plans
to ensure that these provisions are adequate to remedy this problem.
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\257\ 15 U.S.C. 1679.
\258\ NCL-NPRM at 6.
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Therefore, the Commission has determined that it is a deceptive
telemarketing act or practice to fail to disclose the limits on a
cardholder's liability for unauthorized use of a credit card pursuant
to 15 U.S.C. Sec. 1643, and has adopted Sec. 310.3(a)(1)(vi), to
require that this information be disclosed.
Sec. 310.3(a)(1)(vii) -- Disclosures regarding negative option
features
The amended Rule adds a new provision, Sec. 310.3(a)(1)(vii),
which requires sellers and telemarketers to disclose certain material
information any time a seller or telemarketer makes an offer including
any ``negative option feature'' as that term is defined under new Sec.
310.2(t) of the amended Rule. This disclosure, like all of those listed
in Sec. 310.3(a)(1), must be made before a customer pays for goods or
services. This new provision requires disclosure of all material terms
and conditions of the negative option feature.
During the Rule Review, several commenters recommended that the
Commission specifically address the problems associated with ``free''
or ``trial'' offers that include a negative option feature,
particularly when the telemarketer already possesses the consumer's
billing information.\259\ These offers frequently are presented to
consumers as ``low involvement marketing decisions''\260\ in which they
are simply ``previewing'' the product or service. However, the Rule
Review record, as well as federal and state law enforcement experience,
show that consumers frequently are confused about their obligations in
these transactions, mistakenly believing that, because they did not
provide any billing information to the telemarketer, they are under no
obligation unless they take some additional affirmative step to consent
to the purchase.\261\ As a result,
[[Page 4603]]
such scenarios have resulted in significant abuse as consumers discover
they have been charged for something they did not realize they had been
deemed to have consented to purchase.\262\
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\259\ See, e.g. NACAA-RR at 2; NAAG-RR at 11-12, 16-17; NCL-RR
at 5-6.
\260\ NAAG-RR at 11.
\261\ 67 FR at 4501, citing FTC v. Triad Disc. Buying Serv.,
Inc., No. 01-8922 CIV ZLOCH (S.D. Fla. 2001); New York v.
MemberWorks, Inc., Assurance of Discontinuance (Aug. 2000);
Minnesota v. MemberWorks, Inc., No. MC99-010056 (4th Dist. Minn.
June 1999); Minnesota v. Damark Int'l, Inc., Assurance of
Discontinuance (Ramsey County Dist. Ct. Dec. 3, 1999); FTC v. S.J.A.
Soc'y, Inc., No. 2:97 CM 472 (E.D. Va. filed May 31, 1997). To this
list may be added several more law enforcement actions, including
but not limited to actions by state Attorneys General against
BrandDirect Marketing Corp. (Assurances of Discontinuance with the
States of Connecticut and Washington); Cendant Membership Services
(Consent Judgment with State of Wisconsin); Signature Fin. Mktg.
(Assurance of Discontinuance with State of New York); Illinois v.
Blitz Media, Inc. (Sangamon County, No. 2001-CH-592); New York v.
Ticketmaster and Time, Inc. (Assurance of Discontinuance), and
additional actions by New York and California against MemberWorks,
and by New York against Damark Int'l. See NAAG-NPRM at 30, n.73.
\262\ See 67 FR 4513-14, citing NAAG-RR at 11-12.
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In the NPRM, the Commission proposed a broad prohibition on the
receipt or disclosure of a consumer's billing information from any
source other than the consumer herself. This expansive approach would
have obviated the need for a more narrowly-tailored remedy specifically
addressing negative options.\263\ The Commission believed that without
preacquired account information, telemarketers' ability to exploit the
negative option scenario to bill charges to consumers' accounts without
their knowledge or consent would have been eliminated. The seller or
telemarketer would have been required to obtain the account information
directly from the consumer, thus putting the consumer on notice that he
is agreeing to purchase something.\264\
---------------------------------------------------------------------------
\263\ Id. at 4514.
\264\ Id. at 4512-14.
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Based on the entire record in this proceeding, however, the
Commission has determined that a blanket prohibition on preacquired
account telemarketing sweeps too broadly, curtailing much activity that
has not generated a record of consumer harm. As explained in detail
below in Sec. 310.4(a)(6) of this SBP, the Commission has refocused
this aspect of the amended Rule on the core problem of preacquired
account telemarketing, which is to ensure that a customer's consent is
obtained before charges are billed to the customer's account,
regardless of the source from which the seller or telemarketer obtained
the customer's billing information. Therefore, the amended Rule
contains a new provision, Sec. 310.4(a)(6), that prohibits charging a
customer's account without the customer's express informed consent. As
a result of the more narrowly-tailored approach to the problems
associated with preacquired account telemarketing, a new solution to
the problems associated with negative option features is also required.
The amended Rule now takes a two-pronged approach to remedying the
harms associated with offers involving negative option features, either
alone or in combination with preacquired account telemarketing.
Although the record shows that the greatest consumer injury occurs when
these two practices occur together,\265\ each practice can, and often
does, occur without the other,\266\ and both, alone or in combination,
can be problematic for consumers. Thus, the amended Rule sets forth
separate requirements specific to each practice--disclosure
requirements for offers with a negative option feature, in Sec.
310.3(a)(1)(vii); and, separately, consent requirements for offers
where the telemarketer possesses preacquired account information, in
Sec. 310.4(a)(6). The application of these two separate provisions
depends on the details of the transaction, thus addressing with greater
precision different potential telemarketing scenarios.
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\265\ See discussion of Sec. 310.4(a)(6) below.
\266\ For example, the seller or telemarketer of a magazine or
newspaper subscription, who does not have preacquired account
information, may make an offer for a subscription that includes an
automatic annual renewal by obtaining account information or payment
directly from the consumer in the initial transaction. Or, as noted
in the NPRM, a customer may have an ongoing relationship with a
particular contact lens retailer, in which he expects the retailer
to retain account information for future similar purchases, none of
which involve a negative option feature. See 67 FR 4513, n.196.
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Commenters stressed one issue: the need for consumers to clearly
understand and consent to the precise terms of the negative option
feature of an offer.\267\ The problematic aspect of an offer with a
negative option feature is that the consumer's inaction--not an
affirmative action taken by the consumer--is deemed to signal
acceptance (or continuing acceptance) of an offer for goods or
services. By accepting the initial offer (e.g., to try a membership in
a buying club service for 30 days, or to receive a daily newspaper for
six months) and doing nothing further, the consumer actually contracts
to pay for something more (e.g., an automatic annual membership fee or
long-term newspaper subscription renewal). In these circumstances, it
is crucial that consumers clearly understand the precise terms of such
a negative option feature before they agree to accept the initial
``free offer'' or purchase, since this agreement subjects them to
continuing charges, often long-term, if they fail to understand that
they must take action to decline the offer or terminate the agreement.
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\267\ NACAA-RR at 2; NAAG-RR at 11-12; NCL-RR at 5-6; NAAG-NPRM
at 32-33. See also ERA-NPRM at 2-3, 16; June 2002 Tr. II at 209-10
(ERA).
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Therefore, new Sec. 310.3(a)(1)(vii) requires that the following
disclosures must be made if an offer includes any negative option
feature, as that term is defined under Sec. 310.2(t): (1) the fact
that the customer's account will be charged unless the customer takes
an affirmative action to avoid the charge(s); (2) the date(s) the
charge(s) will be submitted for payment; and (3) the specific steps the
customer must take to avoid the charge(s).\268\ As noted above in the
discussion of Sec. 310.2(t) defining ``negative option feature,'' that
term is intended to reach any provision under which a consumer's
failure to take affirmative action to reject the goods or services will
be deemed by the seller to constitute acceptance (or continuing
acceptance) of goods or services. Thus, the term includes, but is not
limited to, ``free-to-pay conversions,'' automatic renewal offers, and
continuity plans.\269\
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\268\ These disclosures are similar to those required in the
Commission's Rule concerning ``Prenotification Negative Option
Plans.'' See 16 CFR 425.2(a)(1).
\269\ Each of these terms describes a form of negative option
feature, as discussed in this SBP at Sec. 310.2(t), regarding the
definition of ``negative option feature,'' and Sec. 310.2(o),
regarding the definition of ``free-to-pay conversion.''
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The required material disclosures must be made truthfully, and in a
clear and conspicuous manner, before a customer pays.\270\ Under the
amended Rule's treatment of preacquired account telemarketing,\271\
``before a customer pays'' shall be construed as meaning before a
customer provides express informed consent to be charged for the goods
or services offered, and to be charged using a specifically identified
account.\272\ Thus, Sec. 310.3(a)(1)(vii), and indeed, all of Sec.
310.3(a)(1), must be read in conjunction with new Sec. 310.4(a)(6),
which prohibits any seller or telemarketer from causing billing
information to be submitted for payment, directly or indirectly,
without the express informed consent of the customer.
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\270\ 16 CFR 310.3(a)(1).
\271\ The Commission has determined to include provisions
prohibiting the disclosure, for consideration, of unencrypted
account information for use in telemarketing in Sec. 310.4(a)(5),
and prohibiting unauthorized billing in Sec. 310.4(a)(6) of the
amended Rule. As explained below in the discussion of these new
provisions, these provisions address the harm caused by sellers or
telemarketers who possess preacquired account information, as well
as the broader abuse of charging a consumer's account without the
consumer's express informed consent, regardless of the nature of the
telemarketing transaction.
\272\ See discussion of Sec. 310.4(a)(6) below.
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[[Page 4604]]
Sec. 310.3(a)(2) -- Prohibited misrepresentations in the sale of goods
or services
Section 310.3(a)(2) in the original Rule prohibits a seller or
telemarketer from misrepresenting certain material information in a
telemarketing transaction, including: total cost; any material
restrictions; any material aspect of the performance, efficacy, nature,
or central characteristics of the goods or services offered; any
material aspect of the seller's refund policy; any material aspect of a
prize promotion; any material aspect of an investment opportunity; and
a seller's or telemarketer's affiliation with, or endorsement by, any
governmental or third-party organization.\273\
---------------------------------------------------------------------------
\273\ See 16 CFR 310.3(a)(2).
---------------------------------------------------------------------------
In the NPRM, the Commission proposed three changes to the
provision. First, the phrase ``in the sale of goods or services'' was
added to the section to clarify that these prohibited
misrepresentations apply only in that context. This change was made
because, pursuant to the mandate of the USA PATRIOT Act, the Commission
proposed adding to the Rule Sec. 310.3(d), which delineates
misrepresentations prohibited in the specific context of charitable
solicitations. Second, Sec. 310.3(a)(2)(vii) was modified slightly to
conform with proposed Sec. 310.3(d)(7) which is an almost identical
provision, but in the charitable solicitation context. Finally, the
Commission proposed an additional prohibited misrepresentation
regarding credit card loss protection plans.\274\
---------------------------------------------------------------------------
\274\ Proposed Rule Sec. 310.3(a)(2)(viii).
---------------------------------------------------------------------------
The Commission received no comments regarding the first two
changes, and thus retains these in the amended Rule.
Sec. 310.3(a)(2)(viii) -- Misrepresentations regarding credit card
loss protection plans
As discussed in detail above, the telemarketing of credit card loss
protection plans has been a persistent source of a significant number
of complaints about fraud and, as a result, has been the target of
numerous law enforcement actions by both the Commission and the state
Attorneys General.\275\ In the NPRM, the Commission proposed two new
provisions to address this practice. The first provision, in Sec.
310.3(a)(1)(vi), discussed above, requires that sellers or
telemarketers of such plans disclose, before the customer pays, the
limit, pursuant to 15 U.S.C. Sec. 1643, on a cardholder's liability
for unauthorized use of a credit card. This provision is retained
unchanged in the amended Rule.
---------------------------------------------------------------------------
\275\ See note 256 above.
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In addition to advising consumers of their rights, the Commission
also believes that additional protection is needed to curb the
misrepresentations that are prevalent in the sale of credit card loss
protection plans. Telemarketers often misrepresent various aspects of
the credit card loss protection plan to consumers, especially the
existing legal limits on consumer liability if their cards are lost or
stolen.\276\ Therefore, the Commission proposed to add a second
provision --Sec. 310.3(a)(2)(viii)--which prohibits sellers or
telemarketers from misrepresenting that any customer needs offered
goods or services to provide protections a customer already has
pursuant to 15 U.S.C. Sec. 1643, which limits a cardholder's liability
for unauthorized charges.\277\
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\276\ See discussion of Sec. 310.3(a)(1)(vi) above, and notes
249 and 253.
\277\ As noted above, this approach parallels the TSR's
treatment of cost and quantity of goods (Sec. Sec. 310.3(a)(1)(i)
and 310.3(a)(2)(i)), material restrictions, limitations, or
conditions (Sec. Sec. 310.3(a)(1)(ii) and 310.3(a)(2)(ii)), refund
policy (Sec. Sec. 310.3(a)(1)(iii) and 310.3(a)(2)(iv)), and prize
promotions (Sec. Sec. 310.3(a)(1)(iv) & (v) and 310.3(a)(2)(v)). In
each case, material facts must be disclosed, and misrepresentations
of those facts are prohibited.
---------------------------------------------------------------------------
The Commission received little comment on this proposed provision.
Those commenters who addressed the Commission's proposal strongly
supported the provision's method of addressing problems with these
plans, noting that complaints about the fraudulent sale of credit card
loss protection plans have continued unabated since the original Rule
became effective.\278\ Therefore, the Commission has determined that it
is a deceptive telemarketing act or practice to misrepresent that any
customer needs particular goods or services in order to have
protections provided pursuant to 15 U.S.C. Sec. 1643, and has adopted
Sec. 310.3(a)(2)(viii), which prohibits a seller or telemarketer from
misrepresenting that any consumer needs to purchase protections that
they already have under 15 U.S.C. Sec. 1643.
---------------------------------------------------------------------------
\278\ DOJ-NPRM at 4; LSAP-NPRM at 7-8; NAAG-NPRM at 55; NCL-NPRM
at 6. See also June 2002 Tr. II at 104; and discussion of Sec.
310.3(a)(1)(vi) above.
---------------------------------------------------------------------------
Sec. 310.3(a)(2)(ix) -- Misrepresentations regarding negative option
feature offers
The original Rule did not specifically require disclosures or
prohibit misrepresentations regarding negative option features in
telemarketing offers. However, as noted above, in the discussion of
Sec. 310.3(a)(1)(vii), as a result of the more narrowly-tailored
approach to the problems associated with preacquired account
telemarketing, a newly focused approach to the problems related to
negative option features is also required. This includes specific
disclosure requirements, which are set forth in Sec. 310.3(a)(1)(vii)
and explained above. Consistent with the structure of the Rule to date,
and to ensure that the disclosures are not only made, but made
truthfully, the amended Rule includes a mirroring provision to these
disclosure requirements, at Sec. 310.3(a)(2)(ix), which prohibits
misrepresentations regarding ``[a]ny material aspect of a negative
option feature including, but not limited to, the fact that the
customer's account will be charged unless the customer takes an
affirmative action to avoid the charge(s), the date(s) the charge(s)
will be submitted for payment, and the specific steps the customer must
take to avoid the charge(s).''
Sec. 310.3(a)(3) -- Express verifiable authorization
Section 310.3(a)(3) of the original Rule requires that a seller or
telemarketer obtain express verifiable authorization in sales involving
payment by demand drafts or similar negotiable paper.\279\ The Rule
also provides that authorization is deemed verifiable if any of three
specified means are employed to obtain it: (1) express written
authorization by the customer, including signature; (2) express oral
authorization that is tape recorded and made available upon request to
the customer's bank; or (3) written confirmation of the transaction,
sent to the customer before submission of the draft for payment. If the
telemarketer chooses to use the taped oral authorization method, the
Rule requires the telemarketer to provide, upon request, tapes
evidencing the customer's oral authorization, including the customer's
receipt of the following information: the number, date(s) and amount(s)
of payments to be made; date of authorization; and a telephone number
for customer inquiry that is answered during normal business
hours.\280\
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\279\ The use of demand drafts, or ``phone checks,'' enables a
merchant to obtain funds from a person's bank account without that
person's signature on a negotiable instrument.
\280\ See original Rule Sec. 310.3(a)(3). Section
310.3(a)(3)(iii)(A) of the original Rule requires that all
information required to be included in a taped oral authorization be
included in any written confirmation of the transaction.
---------------------------------------------------------------------------
In the NPRM, the Commission proposed to amend the express
verifiable authorization provision to
[[Page 4605]]
require that the seller or telemarketer obtain the customer's express
verifiable authorization in any telemarketing transaction where the
method of payment lacks the protections provided by, or comparable to
those available under, the Fair Credit Billing Act (``FCBA'') and the
Truth in Lending Act (``TILA''). In addition, the proposed amendment
would have required that the customer receive two additional pieces of
information in order for authorization to be deemed verifiable: the
name of the account to be charged and the account number, which would
have been required to have been recited by either the customer or
donor, or the telemarketer. The Commission also proposed to delete
Sec. 310.3(a)(3)(iii), which allowed a seller or telemarketer to
obtain express verifiable authorization by confirming a transaction in
writing, provided the confirmation was sent to the customer prior to
the submission of the customer's billing information for payment.
Finally, the Commission proposed in the NPRM, pursuant to the USA
PATRIOT Act, to bring charitable contributions within the coverage of
the express verifiable authorization provision.\281\
---------------------------------------------------------------------------
\281\ Proposed Rule Sec. 310.(3)(a)(3), 67 FR at 4542.
---------------------------------------------------------------------------
Based on the record in this proceeding, the Commission has decided
to modify the proposed express verifiable authorization provision. The
amended Rule prohibits ``[c]ausing billing information to be submitted
for payment, or collecting or attempting to collect payment for goods
or services or a charitable contribution, directly or indirectly,
without the customer's or donor's express verifiable authorization,
except when the method of payment used is a credit card subject to
protections of the TILA and Regulation Z,\282\ or a debit card subject
to the protections of the Electronic Fund Transfer Act (``EFTA'') and
Regulation E.''\283\ This modified language draws a ``bright line'' to
simplify compliance. The amended Rule retains the express written
authorization and oral authorization provisions (Sec. Sec.
310.3(a)(3)(i) and (ii) of the original and proposed Rules), with
slight modifications, and has reinstated the provision of the original
Rule allowing written confirmation, with certain additional
requirements and limitations.
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\282\ TILA, 15 U.S.C. 1601 et seq. (including the FCBA
amendments, at 15 U.S.C. 1637 et seq.), and Regulation Z, 12 CFR
part 226.
\283\ EFTA, 15 U.S.C. 1693 et seq., and Regulation E, 12 CFR
part 205.
---------------------------------------------------------------------------
In addition, certain modifications to this express verifiable
authorization provision have been adopted in the amended Rule pursuant
to the mandate of the USA PATRIOT Act. First, where the term
``customer'' appeared in the original Rule, that term has been replaced
in the amended Rule with the phrase ``customer or donor'' (including,
where applicable, the plural form). Similarly, where the phrase ``goods
or services'' had been used in the Rule, it has been replaced with the
phrase ``goods or services or charitable contribution'' to reflect the
expansion of the Rule to cover charitable solicitations. And, the term
``telemarketing transaction'' has been substituted for the term ``sales
offer,'' again to reflect the expansion of the provision to cover
authorization in the context of a charitable solicitation.
The Commission received numerous comments addressing the proposed
amendments to Sec. 310.3(a)(3). In addition, the topic was the subject
of extensive discussion at the June 2002 Forum.\284\ The major themes
that emerged from the record are summarized below.
---------------------------------------------------------------------------
\284\ See June 2002 Tr. III at 4-52.
---------------------------------------------------------------------------
Express verifiable authorization for novel payment methods. In the
NPRM, the Commission noted two separate rationales in support of the
requirement that a customer's express verifiable authorization be
obtained any time the payment method used lacks certain protections
against unauthorized charges and fails to provide dispute resolution
rights. First, the Commission stated its belief that the use of novel
payment methods may lead to unauthorized billing.\285\ If consumers
fail to understand that a telemarketer has the ability to place a
charge using a novel payment method (such as utility or mortgage
account billing), based on this misperception, they may be induced to
divulge billing information that enables such charges. Second, the
Commission noted that many emerging payment methods lack both dispute
resolution rights and protection against unlimited liability for
unauthorized charges.\286\ These two facts--that consumers can be
charged unwittingly by means of novel payment methods and that the
resulting injury due to unauthorized charges is magnified when dispute
resolution procedures and liability limits are absent--persuaded the
Commission that it was appropriate to require express verifiable
authorization when protections pursuant or comparable to TILA and FCBA
are absent.\287\
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\285\ See 67 FR at 4507. This concern was also articulated by
the Commission in the original rulemaking in connection with the use
of demand drafts as a payment method. 60 FR at 43850-51.
\286\ See 67 FR at 4507.
\287\ Id.
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Comments on the requirement for express verifiable authorization in
novel payment method scenarios were many and varied. Some industry
commenters--with the notable exception of DialAmerica--rejected the
notion that novel payment methods should be subject to more stringent
requirements under the Rule, arguing that, as long as the consumer has
a clear understanding that he or she is purchasing a particular product
or service and that the purchase will be charged to a particular
account, nothing further should be required of the telemarketer.\288\
NACHA advocated scaling back the proposed express verifiable
authorization requirement, which it argued was ``overly broad'' in its
coverage of payment methods, such as debit cards, with protections
comparable to TILA and FCBA.\289\ EFSC noted its concern that emerging
payment methods would be disadvantaged because they would be subject to
the express verifiable authorization provision.\290\
---------------------------------------------------------------------------
\288\ See, e.g., Aegis-NPRM at 4; Green Mountain-NPRM at 27
(``there is little danger that consumers will give their [debit
card] account numbers to telemarketers without knowing that their
accounts will be debited''); ITC-NPRM at 5; NATN-NPRM at 4; Noble-
NPRM at 4; NSDI-NPRM at 4; and Technion-NPRM at 5. But see June 2002
Tr. III at 22 (DialAmerica representative noting that his company
declines to use novel payment methods because it ``had experience
with charging people's bank accounts and [ ] also [with] LEC
billing, and they have not been good experiences.'').
\289\ NACHA-NPRM at 2.
\290\ EFSC-NPRM at 7. See also NATN-NPRM at 4; June 2002 Tr. III
at 39. The Commission notes that it was in part because of this
concern that the original Rule did not require written authorization
in every instance for demand drafts. See 60 FR at 43850-51. The
amended Rule's allowance for obtaining express verifiable
authorization by any of three means, including written confirmation,
should obviate concerns about the burden imposed on sellers who
choose to accept novel payment methods. Further, the Commission
believes, for the reasons stated above, that it is precisely when
such novel methods--unfamiliar to the consumer and devoid of
legally-mandated consumer protections--are used that express
verifiable authorization of a consumer's acquiescence to the
transaction is critical.
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NAAG, on the other hand, supported the Commission's proposed
approach.\291\ Some consumer groups urged the Commission to take an
even more stringent approach than it did in the NPRM, and require
express verifiable authorization in all telemarketing transactions. For
example, NCL argued that since most telemarketers use audio recordings
to verify authorizations anyway, it would hardly be burdensome to
require express verifiable authorization, which
[[Page 4606]]
can be evidenced by such a recording, in every instance.\292\ In
support of this position, NCL offered statistics showing that
complaints to the NFIC for 2001 show that 60 percent of the payments
for fraudulent buyers club offers--a ``category in which nearly all of
the consumers said they never agreed to purchase the service''--were
made by credit card.\293\ According to NCL, even when the payment
method used by consumers may be subject to legal protections, ``all
consumers whose accounts will be billed should have the basic
protections that such [express verifiable authorization] provides.\294\
LSAP concurred, suggesting that the Rule would better serve all
consumers if express verifiable authorization were required in every
purchase.\295\ Similarly, NCLC urged the Commission to extend the
express verifiable authorization requirements to cover all
transactions, or at least those not subject to the protection of FCBA
and TILA.\296\
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\291\ See NAAG-NPRM at 48.
\292\ NCL-NPRM at 5.
\293\ Id.
\294\ Id. (noting that even when legal protections exist to
protect consumers from unauthorized charges, consumers must still
bear the burden to ``contest the charges in the required manner and
time frame to assert their rights''); see also LSAP at 10.
\295\ LSAP-NPRM at 9-11.
\296\ NCLC-NPRM at 8.
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The Commission declines to require in every transaction that a
seller or telemarketer obtain the express verifiable authorization of a
customer or donor prior to submitting billing information for payment.
As it made clear in the original rulemaking, the Commission believes
that the burden of requiring express verifiable authorization is
justified in limited circumstances; namely, when consumers are unaware
that they may be billed via a particular method, when that method lacks
legal protection against unlimited unauthorized charges, and when the
method fails to provide dispute resolution rights.\297\ However, the
Commission agrees that consumers could benefit from a more explicit
Rule provision mandating what should be obvious: a transaction is valid
only when the telemarketer has obtained the consumer's express informed
consent to be charged, and to be charged using a particular account.
Therefore, as is discussed in detail below, new Sec. 310.4(a)(6) of
the Rule explicitly requires, in every telemarketing transaction, that
the seller or telemarketer obtain the express informed consent of the
customer or donor to be charged for the goods or services or charitable
contribution that is the subject of the transaction. This more explicit
treatment will achieve the goals of consumer groups without unduly
burdening industry members with the recordkeeping required by the
express verifiable authorization provision.
---------------------------------------------------------------------------
\297\ See 60 FR at 43850-51. The Commission notes that despite
its request for detailed evidence regarding the cost of obtaining
express verifiable authorization and the prevalence of each of the
three methods allowed by the original Rule, see, e.g., 67 FR 4537;
June Tr. III at 32, there remains a dearth of specific record
evidence regarding such costs. Industry commenters who did address
the cost merely stated that creating and maintaining audio
recordings of express verifiable authorization was ``expensive.''
See, e.g., Capital One-NPRM at 7; June Tr. III at 38 (CCC).
---------------------------------------------------------------------------
The comments from consumer groups addressing the express verifiable
authorization issue opposed the ``comparability'' standard set out in
the proposed amended Rule, i.e., the provision which would have
exempted from the requirement to obtain express verifiable
authorization any payment method with protections comparable to those
available under FCBA and TILA. Some commenters stated that it would be
too difficult for merchants to determine, during the course of each
telemarketing transaction, whether a given payment method had
protections comparable to those available under TILA.\298\ NCL and NCLC
argued that the impermanent nature of voluntary policies, such as the
``zero liability'' guarantees made by MasterCard and VISA, makes them a
poor substitute for legal protection.\299\ NCLC further argued that
such an amendment would ``invite sham internal review
procedures,''\300\ thereby making it deleterious to consumers, by
placing the power of determining which transactions required express
verifiable authorization in the hands of the merchant.\301\
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\298\ See NCLC-NPRM at 2, 4 (noting the exemption from express
verifiable authorization for methods of payment with protections
comparable to TILA and FCBA ``essentially sanctions an on-the-spot
judgment made by telemarketers regarding a complex and much disputed
legal issue. . .''). Some industry members also noted that the
comparability standard was too vague to be useful. See, e.g., CMC-
NPRM at 12; EFSC-NPRM at 4 (noting that the vagueness could inhibit
the use of novel payment methods).
\299\ See NCL-NPRM at 5; NCLC-NPRM at 8.
\300\ NCLC-NPRM at 7.
\301\ See NCLC-NPRM at 4-5.
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Industry commenters, on the other hand, urged the Commission to
clarify that ``comparable protection,'' whether in the form of a
business rule or private contract, should be sufficient to relieve
sellers and telemarketers of requirement to obtain express verifiable
authorization.\302\ In this regard, some industry commenters noted the
``zero liability'' protection for unauthorized charges provided by the
two main issuers of debit cards, VISA and MasterCard, as a voluntary
initiative.\303\ MasterCard and VISA noted that their respective ``zero
liability policies'' provided greater protection to cardholders than is
provided by federal law.\304\ Similarly, Fleet urged the Commission to
take note of the unauthorized use liability provisions that VISA and
MasterCard offer for debit cards.\305\ Other commenters requested that
the Commission explicitly state that certain other protections are
``comparable.''\306\
---------------------------------------------------------------------------
\302\ See, e.g., ABA-NPRM at 7-8; BofA-NPRM at 6; Capital One-
NPRM at 7; Citigroup-NPRM at 10; DMA-NPRM at 56-57.
\303\ Id.
\304\ See MasterCard-NPRM at 4; VISA-NPRM at 5. The Commission
notes, however, that the ``zero liability'' protection offered by
MasterCard and VISA does not come into play in all circumstances.
For example, MasterCard extends this protection only to a consumer
whose account is in good standing and who has not reported two or
more instances of unauthorized use in the past year. See http://www.mastercard.com/general/zero_liability.html.
VISA offers its
coverage only for ``VISA credit and debit card transactions
processed over the VISA network,'' and allows the financial
institution that issued the card to determine liability for
transactions processed over other networks. See http://www.usa.visa.com/personal/secure_with_visa/zero_liability.html?it=f2_/personal/secure_with_visa/
.
\305\ See Fleet-NPRM at 5. See also KeyCorp-NPRM at 5; June Tr.
III at 11 (DMA) (endorsing voluntary protections).
\306\ See Capital One-NPRM at 7 (exempt transactions subject to
the UCC); CMC-NPRM at 12 (state that protections under the Real
Estate Settlement Procedures Act (``RESPA'') and EFTA are comparable
to those under the FCBA and TILA); Fleet-NPRM at 5 (exempt
transactions where the goods or services are subject to a ``liberal
refund policy''); KeyCorp-NPRM at 5 (exempt transactions subject to
the UCC); NACHA-NPRM at 2 (exempt transactions subject to the NACHA
Rules); VISA-NPRM at 5 (exempt transactions subject to UCC when the
revisions to Article 4 are complete). The Commission declines, at
this time, to exclude from the express verifiable authorization
requirement transactions subject to RESPA. While the Commission
recognizes that RESPA provides important protections for consumers,
it does not believe that most real estate transactions would be
subject to the TSR at all. And, in instances of mortgage billing,
which would be subject to the Rule, the Commission believes that
consumers, unfamiliar with this method of billing for anything other
than their mortgage payment, need the protections of the express
verifiable authorization provision. The Commission also declines to
exclude transactions subject to the UCC from the requirements of
express verifiable authorization, but may revisit this issue when
modifications to the UCC are completed. The Commission also declines
to exempt transactions subject to the NACHA Rules or for which the
seller provides a liberal refund policy, believing that it is
preferable to limit exemptions and thus maintain a ``bright line''
rule to simplify compliance.
---------------------------------------------------------------------------
Based on the record evidence, the Commission has decided to
eliminate the ``comparability'' language from the express verifiable
authorization provision. The comments made clear that it is far more
desirable to
[[Page 4607]]
implement a ``bright line'' rule in this instance to avoid the costs to
businesses and consumers of requiring a telemarketer to make a real-
time determination of whether a payment method provides adequate
protection while on the telephone with a consumer. Moreover, the
Commission is persuaded that the impermanent nature of voluntary
consumer protections makes them ill-suited as a predicate for
circumventing the express verifiable authorization provision.\307\
Therefore, the amended Rule requires express verifiable authorization
in all transactions where payment is made by a method other than a
debit card subject to Regulation E, or a credit card subject to
Regulation Z.
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\307\ See June 2002 Tr. III at 29 (NCL) (noting receipt of
complaints about the enforceability of these voluntary protections).
---------------------------------------------------------------------------
Several industry commenters specifically urged the Commission to
ensure that express verifiable authorization not be required when a
consumer uses a debit card to pay for goods and services offered, or a
charitable contribution solicited, through telemarketing. Commenters
raised several arguments in support of this position. First, commenters
noted that debit cards are not ``novel'' payment methods.\308\
Commenters contended that, on the contrary, debit cards are widely
accepted and used by consumers, who understand that by providing their
debit card number in a telemarketing transaction, the account with
which the card is associated will be debited.\309\ Second, commenters
argued that debit cards are subject to the protections of the EFTA and
its implementing regulation, Regulation E, which provide similar,
although not identical, protection to that available under TILA.\310\
Third, commenters argued that distant sellers cannot distinguish
between a debit and credit card until, in the best case scenario, the
consumer reads the entire number.\311\ Finally, commenters noted that
VISA has an ``honor all cards'' policy that would prohibit a merchant
from declining to accept VISA-branded debit cards if it accepted VISA-
branded credit cards.\312\ These commenters contended that the
practical result of requiring express verifiable authorization for
debit cards would be that express verifiable authorization would have
to be obtained in all transactions--whether payment was made by credit
or debit card, demand draft, or any other method.\313\
---------------------------------------------------------------------------
\308\ See, e.g., ABA-NPRM at 6; DMA-NPRM at 57; and ERA-NPRM at
47.
\309\ See, e.g., Collier Shannon-NPRM at 16; Green Mountain-NPRM
at 27; June 2002 Tr. III at 24 (ERA).
\310\ See, e.g., ABA-NPRM at 2-7; AFSA-NPRM at 18-19; BofA-NPRM
at 5-6; Citigroup-NPRM at 10; Collier Shannon-NPRM at 11; KeyCorp-
NPRM at 5; MasterCard-NPRM at 4; NACHA-NPRM at 2. Some commenters
suggested that any method of payment subject to Regulation E be
exempted from the express verifiable authorization requirements. See
Citigroup-NPRM at 10 (exempt all electronic fund transfers,
including wire transfers); EFSC (exempt automated clearinghouse
(``ACH'') transactions, as well as other novel payments, such as
prepaid smart cards). The Commission declines to exempt all
electronic fund transfers subject to Regulation E. The record does
not support exclusion of other methods of payment subject to
Regulation E; and the Commission believes that, despite any consumer
protections available, many emerging payment methods covered by
Regulation E are still relatively unknown to consumers who will thus
benefit from express verifiable authorization when these payment
methods are used.
\311\ BofA-NPRM at 6; Collier Shannon-NPRM at 6 (``Merchants who
process credit and debit card transactions over the phone do not
have the ability to differentiate between credit cards and debit
cards.''); ERA-NPRM at 48; June 2002 Tr. III at 11 (DMA) (noting
that ``it is impossible for a marketer to know whether it's a debit
card or a credit card, in the best instance, until after the entire
number has been given''); June 2002 Tr. III at 18 (NRF) (stating
that ``remote sellers cannot distinguish a debit card from the
credit card with any great degree of reliability pre-purchase'').
\312\ June 2002 Tr. III at 19-20 (NRF) (noting that VISA and
MasterCard ``have what's called an Honor-All-Cards rule'' that
requires that merchants accept any card branded with these issuers'
logos as a condition of being able to accept the VISA and MasterCard
branded credit cards).
\313\ Collier Shannon-NPRM at 6-7; June 2002 Tr. III at 11 (DMA)
(noting that ``[i]n some instances you don't even know [whether a
number provided by a consumer is for a debit or credit card] when
the number is given, which would force marketers to have express
verifiable authorization for everything. . .''). Some commenters
argued that such a provision would have the effect of eliminating or
reducing the use of debit cards as a form of payment. See Gannett-
NPRM at 1-2; Intuit-NPRM at 19.
---------------------------------------------------------------------------
Based on the extensive record on this issue, and on the
Commission's law enforcement experience, the Commission has determined
to modify the express verifiable authorization provision in the amended
Rule. The Commission is persuaded that debit cards should not be
subject to the express verifiable authorization provision, based on
their wide consumer acceptance and the fact that they are subject to
the protections of the EFTA and Regulation E. The Commission believes
that debit cards are so commonly used that it cannot persuasively be
argued that consumers do not understand that when they provide their
debit card account number to a telemarketer, their account can be
debited by using that number.\314\ Moreover, the Commission is
persuaded that the practical result of requiring express verifiable
authorization when a consumer pays using a debit card would be to
require it in all instances when a debit or credit card is used,
because it is not currently possible to distinguish these methods in a
distance transaction.\315\
---------------------------------------------------------------------------
\314\ This is not to say, of course, that an unscrupulous
telemarketer could not misrepresent the purpose for which it needed
such an account number, leading to consumer injury. Section
310.3(a)(4) of the Rule, which prohibits making a false or
misleading statement to induce any person to pay for goods or
services, would come into play in such situations. Moreover, the
record and the Commission's consumer protection experience suggest
that, while consumers do understand that their debit cards can be
used as a method of payment, it is not clear that consumers
understand the varying degrees of consumer protection afforded by
credit versus debit cards. See June 2002 Tr. III at 24-25. The
Commission has issued consumer education materials to reinforce the
material differences in protection under federal law for debit and
credit cards. See, e.g., FTC Facts for Consumers, Credit, ATM and
Debit Cards: What to do if They're Lost or Stolen, http://www.ftc.gov/bcp/conline/pubs/credit/atmcard.htm
.
\315\ See note 311 above.
---------------------------------------------------------------------------
Regulation E provides protections that are similar, though not
identical, to those provided under TILA. Some commenters argued that
express verifiable authorization should be required for debit cards
because Regulation E's three-tiered liability scheme for unauthorized
use, with increasing liability when the unauthorized use is reported
after two business days, is less advantageous for consumers than the
TILA protections, which cap a consumer's losses, in all instances, at
$50.\316\ The Commission believes that this disparity will not
disadvantage consumers who face unauthorized charges pursuant to a
telemarketing transaction. Both Regulation Z and Regulation E provide
that, in a situation where the consumer retains control of the card, no
liability shall attach; Regulation Z does so unconditionally,\317\
while Regulation E provides such protection on condition that the
consumer reports the unauthorized charge within 60 days of transmittal
of the consumer's statement.\318\ The Commission believes that, despite
the reporting requirement imposed by Regulation E, consumers who face
unauthorized charges due to telemarketing fraud have important
fundamental protections whether they use a debit or credit card. The
Commission will continue its campaign to educate consumers about their
varying obligations in reporting unauthorized charges involving both
debit and credit cards, and will monitor the effectiveness of this
provision from
[[Page 4608]]
the implementation of the amended Rule through the next Rule Review,
making any modifications as necessary.
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\316\ Compare Regulation E, 12 CFR 205.6(b) to Regulation Z, 12
CFR 226.12(b).
\317\ See Regulation Z, 12 CFR 226.12(b)(2)(iii), Official Staff
Interpretation, Suppl. I.
\318\ See Regulation E, 12 CFR 205.6(b)(3). The 60-day
notification period is somewhat flexible. Section 205.6(b)(4) notes
that ``[i]f the consumer's delay in notifying the financial
institution was due to extenuating circumstances, the institution
shall extend the [time limit] to a reasonable period.''
---------------------------------------------------------------------------
The record reflects a variety of viewpoints on whether dispute
resolution rights are essential to the determination of whether a
payment method should be excluded from the requirement of obtaining
express verifiable authorization.\319\ The Commission continues to
believe that dispute resolution protection is a key predicate for
excluding a payment method from coverage under the express verifiable
authorization provision, to ensure that consumers are not unduly
burdened during the investigation of any claim of unauthorized billing.
The Commission believes that, although the substantive dispute
resolution protections of Regulation E are somewhat less extensive than
those of Regulation Z,\320\ the core protections provided by Regulation
E--allowing a consumer to report an unauthorized electronic fund
transfer and to receive a provisional credit of the disputed amount
within ten business days of the financial institution's receipt of such
notice--will afford sufficient basic protection to consumers who choose
to use debit cards to pay for goods or services or charitable
contributions in telemarketing transactions.
---------------------------------------------------------------------------
\319\ See ABA-NPRM at 5, 7 (encouraging the Commission to delete
from the express verifiable authorization provision the requirement
that any exempt payment mechanism include dispute resolution
procedures); Collier Shannon-NPRM at 11-15 (noting that the dispute
resolution protections under Regulations E and Z are similar).
\320\ For example, unlike Regulation Z, Regulation E does not
provide that a consumer may assert against a financial institution
all claims (other than tort) and defenses arising out of the
transaction and relating to the failure to resolve the dispute. See
Regulation Z, 12 CFR 226.12(c). However, Collier Shannon argued
that, in some instances, Regulation E provides greater consumer
dispute resolution rights. For example, Collier Shannon noted that
investigations under Regulation E must be completed within ten days
of the financial institution's receipt of the consumer's complaint,
or a provisional credit must be issued. Collier Shannon also noted
that the coverage of the regulations diverges in some instances
because some of the dispute resolution protections available under
Regulation Z only make sense in the context of a credit transaction,
such as the provision that a creditor may not seek to collect funds
or issue a negative statement on a consumer's credit report). See
Collier Shannon-NPRM at Appendix F. The Commission notes, in regard
to the argument made by Collier Shannon regarding the shorter time
period allowed for investigations under Regulation E, that a shorter
time frame is entirely appropriate because the funds at issue are
the consumer's, not the funds of a credit card lender.
---------------------------------------------------------------------------
Furthermore, the Commission notes that its decision not to require
express verifiable authorization for payments made by debit card is
based in part on the practical reality that it is currently impossible
for merchants to distinguish credit cards from debit cards,
particularly in distance transactions. The Commission believes that the
appropriate balance of protecting consumers without unduly burdening
industry is best met by excluding debit cards from the requirements of
the express verifiable authorization provision, for to do otherwise
would result in requiring express verifiable authorization for all
credit card payments, an unnecessary and costly burden.\321\ The core
dispute resolution protection provided by Regulation E, in conjunction
with its critical protection against unauthorized charges, will provide
a vital safety net for consumers who choose to pay by debit card. Thus,
the Commission has determined that express verifiable authorization
will be required only in instances when the payment method is not a
credit card subject to the protections of Regulation Z or a debit card
subject to the protections of Regulation E.\322\
---------------------------------------------------------------------------
\321\ See June 2002 Tr. III at 11 (DMA) (noting that requiring
express verifiable authorization in all instances would be ``highly
expensive.'').
\322\ Cendant requested that the Commission explicitly note in
the Rule that the marketer can rely upon the statement by the
consumer identifying the type of billing mechanism that the customer
is using to pay. Cendant-NPRM at 9. The Commission believes that its
modified approach, exempting from the express verifiable
authorization provision both credit and debit cards, obviates the
need for such a statement to be included in the Rule.
---------------------------------------------------------------------------
Express written authorization. Section 310.3(a)(3)(i) of the
proposed Rule states that authorization will be deemed verifiable if it
is by ``express written authorization . . . which includes the
customer's or donor's signature.'' The footnote to this section of the
Rule notes that ``the term `signature' shall include a verifiable
electronic or digital form of signature, to the extent that such form
of signature is recognized as a valid signature under applicable
federal law or state contract law.''
The Commission received few comments on this provision overall.
AARP reiterated its long-standing position that all express verifiable
authorizations should be in writing.\323\ The Commission maintains its
position that to require written authorization in every instance would
unduly burden sellers and telemarketers, potentially impede the growth
of new payment mechanisms, and not provide meaningful benefits to
consumers above and beyond those ensured by the other two means of
obtaining authorization under the Rule. Therefore, the Commission
declines to require written authorization of a transaction in every
instance. Another commenter requested clarification that a signed check
would meet the requirements of Sec. 310.3(a)(3)(i) of the amended
Rule.\324\ The original Rule's express verifiable authorization only
pertained to demand drafts; and, as the Commission noted in the TSR
Compliance Guide, ``[a]ny form of written authorization from a consumer
is acceptable,'' including ``a `voided' signed check.''\325\ While the
language of the amended Rule is arguably broad enough to cover payment
methods such as check and money order, the customer's or donor's signed
check or money order would, in every instance, be sufficient to serve
as written authorization pursuant to 310.3(a)(3)(i).
---------------------------------------------------------------------------
\323\ AARP-NPRM at 7.
\324\ Tribune at 7.
\325\ TSR Compliance Guide at 19.
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A handful of commenters addressed the interplay between the E-SIGN
Act\326\ and the Rule. One industry commenter urged that the Commission
explicitly state that the E-SIGN Act governs transactions under the
TSR,\327\ and another requested the amended Rule expressly adopt the
definitions of ``electronic record'' and ``electronic signature'' used
in the E-SIGN Act.\328\ In particular, commenters expressed concern
over the Commission's use of the term ``verifiable''\329\ as a modifier
in discussing what would constitute a valid signature under the Rule.
While the Commission declines at this time to expressly incorporate the
E-SIGN Act's definitions into the Rule, it has determined that deleting
the term ``verifiable'' from the amended Rule will alleviate the
concerns expressed by industry, without compromising the protections
afforded to consumers.\330\
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\326\ Electronic Signatures in Global and National Commerce Act
(``E-SIGN Act''), Pub. L. No. 106-229, 106th Cong. 2d Sess., 114
Stat. 464 (2000), codified at 15 U.S.C. Sec. 7001 et seq.
\327\ EFSC-NPRM at 9-10.
\328\ Intuit-NPRM at 22.
\329\ 67 FR 4542. In the NPRM, the Commission noted, in a
footnote to Sec. 310.3(a)(3)(i), that ``[f]or purposes of this
Rule, the term `signature' shall include a verifiable electronic or
digital form of signature, to the extent that such form of signature
is recognized as a valid signature under applicable federal law or
state contract law.'' (emphasis added).
\330\ The Commission believes that the remaining language
regarding signatures makes plain that sellers and telemarketers who
choose to obtain express verifiable authorization using the express
written authorization method, and who wish to use digital or
electronic signatures, will need to comply with applicable federal
law and state contract law. The Commission believes, by way of
example, that a seller or telemarketer who obtained a signature that
would be valid under the E-SIGN Act's standards would meet its
burden under this provision of the Rule.
---------------------------------------------------------------------------
NCLC suggested that the Rule incorporate the procedures set forth
in Sec. 101(c) of the E-SIGN Act for using electronic records to
provide a consumer with written disclosures
[[Page 4609]]
required by the Rule.\331\ Under Sec. 101(c), the consumer must, among
other things, affirmatively consent to such use of electronic records
and acknowledge that he or she has the hardware and software necessary
to access the requisite information electronically. The Commission is
deferring any determination at this time as to the specific manner in
which the Rule should incorporate these statutory procedures until it
has clearer evidence or experience from which to develop an appropriate
and effective regulatory interpretation, consistent with the E-SIGN
Act, to ensure that written disclosures required under the Rule are
provided clearly and conspicuously to consumers if and when a seller or
telemarketer uses electronic means to provide such disclosures.\332\
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\331\ NCLC-NPRM at 3.
\332\ See generally FTC and Dept. of Commerce, Report to
Congress on the Electronic Signatures in Global and National
Commerce Act: The Consumer Consent Provision in Section
101(c)(1)(C)(ii), June 2001 (noting that nearly all participants in
a workshop held to discuss the provision agreed that further study
of the provision and its role in the marketplace was necessary). See
also E-SIGN Act Sec. 104 (preserving agency authority to interpret
Sec. 101).
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Finally, NCLC suggested that the Commission require that the
information set forth in Sec. 310.3(a)(3)(ii)(A)-(G), be required when
the written method of express verifiable authorization is used.\333\
The Commission declines to adopt this suggestion because the record
does not support the argument that such a requirement is necessary in
instances when the consumer controls the method of payment, and
provides written authorization, including a signature, to the seller or
telemarketer prior to the submission for payment of the consumer's
billing information.
---------------------------------------------------------------------------
\333\ NCLC-NPRM at 10-11.
---------------------------------------------------------------------------
Oral authorization. The proposed Rule modified and expanded the
list of information that must be recited in order for oral
authorization to be deemed verifiable. In particular, the proposed Rule
added the requirement that the specific billing information of the
customer or donor, including the name of the account and the account
number that will be used to collect payment for the transaction, must
be identified as part of the express verifiable authorization process.
Finally, certain wording changes were proposed to address the expansion
of the express verifiable authorization provision to cover not just
demand drafts, but all methods of payment that lacked specific
protections under TILA and FCBA. In addition, the information was
reorganized.\334\
---------------------------------------------------------------------------
\334\ See Proposed Rule Sec. 310.3(a)(3)(ii)(A)-(D), (F)-(G).
For example, the term ``draft,'' used in the original provision, was
replaced with the phrase ``debit(s), charge(s), or payment(s)'' in
the proposed version, to reflect that methods of payment other than
demand draft would now be covered by the Rule. For the same reason,
and because of the mandate of the USA PATRIOT Act, the term
``payor's'' was replaced by the phrase ``customer's or donor's.''
---------------------------------------------------------------------------
In Sec. 310.3(a)(3)(ii) of the amended Rule, the Commission has
retained the proposed oral authorization provision, with three minor
wording changes. First, the broader term ``other billing entity''
replaces the term ``credit card company,'' which was included in the
proposed Rule as an example of an entity to whom a seller or
telemarketer would need to make available a recording of a customer's
or donor's express oral authorization. Second, the phrase
``authorization of payment for goods or services or charitable
contribution'' is inserted to reflect the expansion of this provision
to reach charitable solicitations. Third, the term ``sales offer'' has
been replaced with ``telemarketing transaction.'' These last two
changes are intended to conform this provision to the mandate of the
USA PATRIOT Act.
Few comments were prompted by this section generally, or by any of
the specific proposed disclosures required to satisfy the oral
authorization provision. One commenter noted that the audio recording
method of obtaining express verifiable authorization may require the
consent of the customer or donor in states that require two-party
consent to record telephone calls.\335\ The Commission notes that
determining compliance with state law taping requirements has been and
will continue to be the responsibility of those sellers and
telemarketers who choose to use this method of authorization. Another
commenter asked the Commission to state explicitly that ``a
telemarketer cannot circumvent a writing requirement [such as required
by EFTA for recurring drafts] by holding up the express oral
authorization in the [TSR].''\336\ Clearly, compliance with the EFTA
and compliance with the TSR are separate obligations, and to the extent
that an entity is subject to both regulations, it must determine how
best to comply with both. Therefore, the Commission declines to modify
the Rule to include such guidance.
---------------------------------------------------------------------------
\335\ Worsham-NPRM at 6.
\336\ NCLC-NPRM at 11.
---------------------------------------------------------------------------
Another commenter, ARDA, requested that Sec. 310.3(a)(3)(ii)(A),
which requires disclosure of the number of debits, charges or payments,
be modified. ARDA requested that the parenthetical phrase ``if more
than one'' be reinstated in the Rule to ensure that this disclosure is
only made in instances where there will be multiple debits, charges, or
payments; to do otherwise, ARDA argued, would be a burden on industry
to state what would likely be presumed by consumers--that is, that only
a single payment will be required.\337\ The Commission agrees that the
benefit to consumers of disclosing that there will only be a single
payment does not outweigh the burden on sellers and telemarketers to
have to make such a disclosure. Therefore, the Commission has
reinstated the phrase ``(if more than one)'' at the end of Sec.
310.3(a)(3)(ii)(A). No comments in the record suggest modification of
proposed Sec. 310.3(a)(3)(ii)(C) (requiring disclosure of the amount
of the debit(s), charge(s), or payment(s)); (D) (disclosure of the
customer's or donor's name); (F) (the disclosure of a telephone number
for customer or donor inquiry); or (G) (the date of the customer's or
donor's oral authorization). Therefore, these sections are retained in
the amended Rule without alteration.
---------------------------------------------------------------------------
\337\ ARDA-NPRM at 5-6.
---------------------------------------------------------------------------
Proposed Sec. 310.3(a)(3)(ii)(B) required that ``the date of the
debit(s), charge(s), or payment(s)'' be recited for oral authorization
to be deemed verifiable. This proposal drew criticism from members of
industry, including MasterCard and KeyCorp, who noted that, in many
instances, telemarketers would not possess this information, and
suggested that the frequency of the payment could be recited
instead.\338\ The Commission agrees that in at least some instances the
exact date of payment--that is, the date on which the charge will
appear on a customer's or donor's billing statement or be debited from
a customer's or donor's account--may be unknown at the time of the
transaction. Therefore, the amended Rule provision requires instead
that the seller or telemarketer recite the date on which the debit(s),
charge(s), or payment(s) will be submitted for payment. The Commission
believes that this piece of information is, or without much burden can
be, known to a seller or telemarketer, and that providing this date to
the customer or donor will supply a means for determining approximately
when such debit(s), charge(s), or payment(s) will be posted to the
customer's or donor's account.
---------------------------------------------------------------------------
\338\ MasterCard-NPRM at 6-7; KeyCorp-NPRM at 5.
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Several commenters also expressed concern about the requirement, in
Sec. 310.3(a)(3)(ii)(E), that, as part of oral authorization, a
customer or donor
[[Page 4610]]
receive his or her specific billing information, including the name of
the account and the account number to be charged.\339\ These commenters
stated that there are dangers inherent in having a telemarketing sales
representative recite or receive from the consumer the consumer's full
account number over the telephone.\340\
---------------------------------------------------------------------------
\339\ See, e.g., AFSA-NPRM at 17-18; CCC-NPRM at 12
(recommending Sec. 310.3(a)(3)(ii)(E) be deleted entirely);
DialAmerica-NPRM at 27 (noting its support for the disclosure of the
account name); Fleet-NPRM at 6; KeyCorp-NPRM at 5; MasterCard-NPRM
at 5 (noting that if the provision is not deleted, the amended Rule
should at least exempt from compliance entities subject to the
privacy provisions of the GLBA); Wells Fargo-NPRM at 3.
\340\ See, e.g., KeyCorp-NPRM at 5; MasterCard-NPRM at 5. These
commenters expressed concern about identity theft and unauthorized
charges occurring as a result of the express disclosure of this
information. Several commenters noted that consumers are disinclined
to provide their account numbers in telemarketing, in part due to
the success of consumer protection education campaigns that have
stressed that a consumer should only provide his or her account
number in telemarketing if the consumer knows the seller with whom
he or she is dealing. See, e.g., Bank One-NPRM at 4; Cendant-NPRM at
7; Household Auto-NPRM at 2-3; VISA-NPRM at 6-7. Some commenters
noted that marketers will not have such account numbers in some
instances, such as in preacquired account telemarketing involving a
joint marketing program, and thus will be unable to ensure the
customer's ``receipt'' of this information. See, e.g., Household
Auto-NPRM at 4; NEMA-NPRM at 8-10 (noting that the `` receipt''
language directly contradicts the NEMA's guidelines to ensure that
the customer ``disclose'' such information before processing a
charge, and will result in duplicative information being exchanged);
Green Mountain-NPRM at 26 (requesting an exemption because the
energy industry is highly regulated). As discussed below, the
Commission decided to delete the requirement that the account number
be disclosed, and therefore the Commission anticipates that this
will ameliorate the concern about preacquired account telemarketing.
In every instance, the seller or telemarketer should be able to tell
the customer or donor the name of the billing vehicle and enough
other information to ensure that the customer or donor knows what
account will be used to collect payment. As to NEMA's and, to some
extent, Green Mountain's concern about redundancy, it is true that
in a non-preacquired account call, some information, such as the
customer's or donor's billing information, will initially be unknown
to the telemarketer. It is equally true that some of the information
a customer must receive under Sec. 310.3(a)(3)(ii) is known only to
the telemarketer, such as the date a charge will be submitted for
payment and a customer or donor service number. The Commission
believes that, for payment methods that are novel and lacking in
certain consumer protections, it is critical for the customer to
authorize the payment. If a seller or telemarketer chooses the
express oral authorization method, then it is incumbent upon them to
ensure that a consumer receives this information, even if redundant,
as part of the recorded authorization.
---------------------------------------------------------------------------
On the other hand, comments from consumer groups were generally
supportive of the expanded disclosures required as a predicate for oral
authorization to be deemed verifiable. NCL noted that billing disputes
are prevalent in connection with deceptive or abusive telemarketing,
and complaints about such disputes often arise when a consumer has been
duped into providing his or her billing information for some bogus
purpose, such as ``verification,'' or to enable the seller purportedly
to deposit sweepstakes winnings to the consumer's account.\341\ NCL
also noted that consumers may provide their account information in
conjunction with a payment for a particular item, but then be billed
for additional goods or services that they did not authorize.\342\
Based on its experience, NCL ``believes that it is important to verify
both the account that will be billed and the fact that the consumer is
agreeing to purchase specific products or services using that
account.''\343\ NAAG concurred, stating that the proposed Rule's
express requirements to recite the account name and number would be
beneficial to consumers who, as law enforcement experience
demonstrates, may otherwise be unaware of this critical
information.\344\
---------------------------------------------------------------------------
\341\ NCL-NPRM at 4.
\342\ Id.
\343\ Id.
\344\ NAAG-NPRM at 48-49.
---------------------------------------------------------------------------
Based on the record, the Commission has decided to modify the
proposed provision to limit the required amount of information about an
account that must be received by a customer or donor to comply with the
express verifiable authorization provision. The amended Rule requires
that the customer or donor receive ``billing information, identified
with sufficient specificity that the customer or donor understands what
account will be used to collect payment for the goods or services or
charitable contribution.''\345\ This more flexible standard takes into
account concern about identity theft, but still mandates that the
customer receive information sufficient to understand what account is
being used to process payment for the transaction. It will allow
telemarketers the option to state, for example, the name and the last
four digits of the account to be charged, rather than the full account
number.
---------------------------------------------------------------------------
\345\ Amended Rule Sec. 310.3(a)(3)(ii)(E). The requirement
that the account be identified with sufficient specificity that the
customer or donor understands what account will be used to collect
payment mirrors the provision in amended Rule Sec.
310.4(a)(6)(ii)(A), requiring that, in telemarketing transactions
involving preacquired account information, a seller or telemarketer
obtain express informed consent by identifying the account to be
charged with specificity such that the customer or donor understands
what account will be charged.
---------------------------------------------------------------------------
Written confirmation. The Commission received several comments
regarding its proposal to delete Sec. 310.3(a)(3)(iii) from the Rule.
This section of the original Rule allows a seller or telemarketer to
obtain express verifiable authorization by sending written confirmation
of the transaction to the customer prior to submitting the customer's
billing information to be charged. In general, industry commenters
opposed the Commission's proposal to delete this provision from the
Rule, arguing that, contrary to the evidence presented during the Rule
Review, this method of authorization is commonly used in
telemarketing.\346\ Aegis noted that there is nothing ``inherently
fraudulent, abusive, or problematic'' with this method of obtaining
express verifiable authorization, and urged the Commission to retain
it.\347\ Industry commenters urged the Commission to retain this
provision, especially because it provides a low-cost alternative to
recording a customer's oral authorization.\348\
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\346\ See, e.g., ARDA-NPRM at 5 (noting that the written
confirmation method may actually increase in popularity if the
additional requirements during oral authorization are adopted in a
final Rule); ARDA-Supp. at 1 (noting that the Rule should allow for
flexibility given the rapid technological changes in payment
methods); CCC-NPRM at 14 (asserting that ``this method is readily
available, straightforward, reliable and is currently used by many
marketers.''); CNHI-NPRM at 1 (noting that eliminating this method
would place newspapers at ``an unfair competitive disadvantage'');
EFSC-NPRM at 8; NAA-NPRM at 16 (``many newspapers regularly and
legitimately used this method'' and would incur considerable expense
using the written or oral authorization methods instead).
\347\ Aegis-NPRM at 4. Accord Noble-NPRM at 4 (arguing there is
nothing inherently fraudulent about this method of authorization);
PMA-NPRM at 20 (suggesting that the record does not support
elimination of this method of authorization); Technion-NPRM at 5
(arguing there is nothing ``wrong with'' this method of
authorization).
\348\ See, e.g., Capital One-NPRM at 8; Gannett-NPRM at 1;
Intuit-NPRM at 19-20; MPA-NPRM at 27; PMA-NPRM at 20 (urging that
this method be retained in part to reduce costs for inbound call
centers who, under proposed revisions to address upselling, would
need to conduct express verifiable authorization and may not be
equipped to do so by taping); June 2002 Tr. III at 40-42 (CCC,
noting that written confirmation ``is the cheapest way of
effectuating a transaction;'' ERA, stating that reinstating the
written confirmation method will ``help balance the additional
costs'' incurred due to the expansion of the express verifiable
authorization requirement).
---------------------------------------------------------------------------
Consumer groups and law enforcement officials expressed their
support for deleting this provision from the Rule, or modifying it to
ensure that consumers are better protected when this method is
used.\349\ NAAG, for example, noted the potential danger inherent in
the written confirmation provision as it is worded in the original
Rule. Specifically, NAAG opined that consumers are likely to overlook a
confirmation that appears to be yet
[[Page 4611]]
another piece of ``junk mail,''\350\ and recommended that the Rule be
amended to specifically require that any confirmation document sent
pursuant to this method of authorization be clearly and conspicuously
labeled as such.\351\ NAAG also suggested that, if reinstated, the
written confirmation method should not be considered a ``verifiable''
means of obtaining consumers' authorization in circumstances when the
consumer is already vulnerable, such as when the goods or services to
be paid for are offered in conjunction with a ``free-to-pay
conversion'' or ``negative option feature,'' or when the seller or
telemarketer has preacquired account information prior to the
initiation of the call.\352\ MPA suggested that perhaps this method
could be reinstated if used in the sale of goods or services for which
a liberal refund policy exists.\353\ NAAG raised the concern that there
might exist a material inconsistency between the disclosures made in
the sales portion of the call and those sent as part of a post-call
confirmation.\354\
---------------------------------------------------------------------------
\349\ See, e.g., NAAG-NPRM at 49.
\350\ Id. (noting that such confirmations ``tend to go unnoticed
or unrecognized by consumers, thereby failing in their function of
`authorizing' a payment'').
\351\ Id.
\352\ See June 2002 Tr. III at 42-43 (NAAG).
\353\ Id. at 44 (MPA).
\354\ Id. at 48-49 (NAAG).
---------------------------------------------------------------------------
In response to this range of comment, the Commission has decided to
reinstate the written confirmation method of obtaining express
verifiable authorization, with certain modifications. After balancing
the concerns enunciated by consumer groups against industry's strongly-
stated desire to reinstate this economical means of obtaining express
verifiable authorization, the Commission has determined to modify the
provision to enhance the likelihood that consumers will receive these
written confirmations in a timely manner and will recognize the
confirmations as important documents that should not be thrown away
unopened. The amended Rule continues to require that the written
confirmation disclose all of the information contained in Sec.
310.3(a)(3)(ii)(A)-(G), as well as a statement of the procedures by
which the customer can obtain a refund from the seller or telemarketer
or charitable organization in the event the confirmation is inaccurate.
However, the amended Rule requires that the written confirmation be
``clearly and conspicuously labeled'' as such, on the outside of the
envelope in which it is sent, and that it be sent to the customer by
first class mail\355\ prior to the submission for payment of the
customer's or donor's billing information.\356\ The Commission will
continue to monitor the use of the post-sale written confirmation
method of express verifiable authorization and may revisit this issue
in a subsequent Rule Review should circumstances warrant.
---------------------------------------------------------------------------
\355\ The requirement that such confirmations be sent via first
class mail should cause industry to incur no additional expense.
According to the DMA representative at the June 2002 Forum, federal
postal regulations require that such confirmations be sent via first
class mail. See June 2002 Tr. III at 45; see also June 2002 Tr. III
at 47 (CCC) (noting that company practice is to ensure that written
confirmations are clearly and conspicuously labeled). This change to
the Rule, then, will merely echo the postal regulations, which
require that personalized business correspondence be sent via first
class mail. See 39 CFR 3001.68, App. A.
\356\ The Commission has declined, at this time, to follow the
suggestion by Capital One that the written confirmation method
should be reinstated, ``provided that the confirmation is delivered
30 days prior to submission for payment, and the customer is
permitted to repudiate the sale within that time by calling a toll-
free number,'' because the record provides too little evidence to
suggest that these additional protections are necessary to prevent
consumer injury. See Capital One-NPRM at 8.
---------------------------------------------------------------------------
The amended Rule also proscribes the use of the post-sale method of
authorization when the goods or services that are the subject of the
transaction are offered in conjunction with a ``free-to-pay
conversion'' feature and preacquired account information. The record is
replete with evidence, detailed in the section below discussing new
Sec. 310.4(a)(6), that ``free-to-pay conversion'' offers, particularly
when coupled with the use of preacquired account information, have
often resulted in unauthorized charges to consumers.\357\ Given this
evidence, coupled with NAAG's observation that ``[a] consumer who does
not believe they entered into a transaction would be less likely to
even open mail from a company whose offer he or she had recently
`declined,'''\358\ the Commission will require that authorization in
such situations must be obtained pursuant to either Sec.
310.3(a)(3)(i) or (ii).
---------------------------------------------------------------------------
\357\ See discussion of amended Rule Sec. 310.4(a)(6), below.
See also June 2002 Tr. III at 42-43 (NAAG).
\358\ NAAG-NPRM at 49.
---------------------------------------------------------------------------
Sec. 310.3(a)(4) -- Prohibition of false and misleading statements to
induce the purchase of goods or services or a charitable contribution
The only proposed modification of this provision in the NPRM was to
expand it, pursuant to the mandate of the USA PATRIOT Act, to encompass
misrepresentations made to induce a charitable contribution.\359\ The
Commission received few comments on this section, and none opposing
this proposed expansion.\360\ Therefore, the Commission adopts the
wording of proposed Sec. 310.3(a)(4) unchanged in the amended Rule.
---------------------------------------------------------------------------
\359\ Proposed Rule Sec. 310.3(a)(4). See 67 FR 4508.
\360\ See, e.g., Make-A-Wish-NPRM, passim (detailing complaints
received by Make-A-Wish, which does not solicit donations by
telephone, regarding fraudulent telemarketers claiming or implying
that they are calling from or affiliated with Make-A-Wish).
---------------------------------------------------------------------------
Sec. 310.3(b) -- Assisting and facilitating
Section 310.3(b) of the original Rule prohibits a person from
providing substantial assistance or support to any seller or
telemarketer when that person knows or consciously avoids knowing that
the seller or telemarketer is violating certain provisions of the Rule.
During the Rule Review, the Commission received comments from consumer
protection and law enforcement groups who argued that the ``conscious
avoidance'' standard adopted in the original Rule should be modified to
a ``knew or should have known standard.''\361\ The Commission noted
that it continued to support the ``conscious avoidance'' standard,
believing that such a standard is appropriate ``in a situation where a
person's liability to pay redress or civil penalties for a violation of
this Rule depends on the wrongdoing of another person.''\362\ Although
the provision was retained in the proposed Rule without amendment, its
coverage was expanded to cover assisting and facilitating in the
solicitation of charitable contributions pursuant to the USA PATRIOT
Act. The Commission invited additional comment on, and proposed
alternatives to, the assisting and facilitating standard.\363\
---------------------------------------------------------------------------
\361\ See 67 FR at 4508-09.
\362\ Id. at 4509.
\363\ Id.
---------------------------------------------------------------------------
In response to the NPRM, VISA noted that although this provision
was retained unchanged in the proposed Rule, ``the expanded scope of
the Proposed Rule, including provisions that conflict with the GLBA
privacy rules, could require financial institutions to police the
activities of third parties, many of whom are themselves regulated
entities.''\364\ The Commission believes that the modifications to the
preacquired account telemarketing provisions in the amended Rule
obviate the concerns expressed by VISA.\365\
---------------------------------------------------------------------------
\364\ VISA-NPRM at 12.
\365\ See discussion of amended Rule Sec. Sec. 310.4(a)(5) and
(6) below.
---------------------------------------------------------------------------
ARDA expressed its support for retaining the ``conscious
avoidance'' standard, endorsing the rationale
[[Page 4612]]
enunciated by the Commission in the NPRM for the heightened knowledge
requirement.\366\ But AARP reiterated its concern that the conscious
avoidance standard places too high a burden on law enforcement, and
urged the Commission to substitute a ``knew or should have known''
standard for the assisting and facilitating provision.\367\ NACAA also
urged the Commission to adopt a ``knew or should have known'' standard
in the amended Rule.\368\ NAAG made a similar recommendation, noting
that the current standard results in ``both federal and state
authorities [being] unduly hampered in trying to reduce telemarketing
fraud.''\369\ NAAG also noted that this provision is critical in
addressing the participation of those United States-based entities,
such as sellers of victim lists, fulfillment house operators, and
credit card launderers, who provide necessary assistance to fraudulent
telemarketers, many of whom have begun operating from outside the
country.\370\
---------------------------------------------------------------------------
\366\ ARDA-NPRM at 6.
\367\ AARP-NPRM at 8.
\368\ NACAA-NPRM at 8.
\369\ NAAG-NPRM at 56.
\370\ Id. (suggesting that liability for those who assist and
facilitate is particularly important when the fraudulent
telemarketer holds no assets in the United States).
---------------------------------------------------------------------------
The Commission declines, on the record evidence, to lower the
standard for assisting and facilitating under the Rule. The Commission
continues to believe the ``conscious avoidance'' standard is the
appropriate one in instances when liability to pay redress or civil
penalties rests on another person's violation of the Rule. Further, the
Commission believes the ``conscious avoidance'' standard is one that
can be met in situations where third parties provide substantial
assistance to fraudulent telemarketers. As stated in the original SBP,
this standard ``is intended to capture the situation where actual
knowledge cannot be proven, but there are facts and evidence that
support an inference of deliberate ignorance.''\371\ In the
hypothetical situations posed in NAAG's comment, the Commission
believes it would be possible to demonstrate such ``deliberate
ignorance'' on the part of, for example, a fulfillment house that ships
only inexpensive prizes on behalf of a telemarketer about whom it
receives numerous complaints. The Commission itself has brought several
cases successfully using the assisting and facilitating provision, and
has found the provision to be a useful tool in combating fraudulent
telemarketing.\372\
---------------------------------------------------------------------------
\371\ 60 FR at 43852.
\372\ See 67 FR at 4509, n.155. See also FTC v. Allstate Bus.
Distrib'n. Ctr., Inc., No. 00-10335AHM (CTX) (C.D. Cal. 2001); FTC
v. Sweet Song Corp., No. CV-97-4544 LGB (Jgx) (C.D. Cal. 1997); FTC
v. Walton (d/b/a Pinnacle Fin. Servs.), No. CIV98-0018 PCT SMM (D.
Ariz. Jan. 1998).
---------------------------------------------------------------------------
Sec. 310.3(c) -- Credit card laundering
In the NPRM, the Commission retained the original Rule provision
addressing credit card laundering, but noted that the coverage of the
provision in the proposed Rule would expand to cover credit card
laundering in the solicitation of charitable contributions, pursuant to
the mandate of the USA PATRIOT Act.\373\ Although the proposed Rule was
issued with this provision unmodified, the Commission expressed concern
that the provision's ``usefulness may be unduly restricted by the
phrases `[e]xcept as expressly permitted by the applicable credit card
system,' in the preamble to Sec. 310.3(c), and `when such access is
not authorized by the merchant agreement or the applicable credit card
system,' in Sec. 310.3(c)(3).''\374\
---------------------------------------------------------------------------
\373\ See 67 FR at 4509.
\374\ Id.
---------------------------------------------------------------------------
Having received no comment regarding the credit card laundering
provision generally, or regarding the Commission's specific concerns,
the Commission has determined to retain this provision in its original
form. The Commission will continue to monitor its effectiveness,
however, and may reconsider modifications at the next Rule Review.
Sec. 310.3(d) -- Prohibited deceptive acts or practices in the
solicitation of charitable contributions
Pursuant to Sec. 1011(b)(1) of the USA PATRIOT Act, the Commission
proposed in the NPRM to include in the Rule new prohibited
misrepresentations in the solicitation of charitable
contributions.\375\ The amended Rule retains Sec. 310.3(d) unchanged,
with the following exceptions. First, the phrase ``after any
administrative or fundraising expenses are deducted'' has been deleted
from Sec. 310.3(d)(4). The Commission believes that the provision is
clearer absent this qualifying phrase, and thus has stricken it in the
amended Rule. Second, Sec. 310.3(d)(6), the prohibited
misrepresentation regarding advertising sales has been deleted. As
discussed below, in the section addressing Sec. 310.6(b)(7), the
Commission has determined to exempt from the Rule's coverage business-
to-business calls to induce a charitable solicitation. As a result, the
prohibition against misrepresentations regarding the sale of
advertising, which would occur in a business-to-business context, is no
longer necessary. Finally, proposed Sec. 310.3(d)(7), prohibiting
misrepresentations regarding a charitable organization's or
telemarketer's affiliation with, or endorsement or sponsorship by, any
person or government entity, is renumbered in the amended Rule as Sec.
310.3(d)(6).
---------------------------------------------------------------------------
\375\ Id. at 4509-10 (discussing the reasoning behind the
prohibited misrepresentations included in proposed Rule Sec.
310.3(d)).
---------------------------------------------------------------------------
Section 310.3(d) prohibits misrepresentations regarding certain
material information that a telemarketer might choose to convey to a
donor to induce a charitable contribution.\376\ The goal of the
prohibition on these misrepresentations is to ensure that donors
solicited for charitable contributions are not deceived, a purpose
squarely in line with the mandate of the USA PATRIOT Act, which
directed the Commission to include ``fraudulent charitable
solicitations'' in the deceptive practices prohibited by the TSR.\377\
Deception occurs if there is a representation, omission, or practice
that is likely to mislead consumers acting reasonably under the
circumstances, and the representation, omission, or practice is
material.\378\ As set forth in the NPRM, the Commission believes that
if any of the items listed in this section are misrepresented, donors
are likely to be misled, as false representations of material facts are
likely to mislead.\379\ Moreover, the Commission's enforcement
experience shows that often such representations are express, and
therefore presumptively material. If implied, such representations are
still likely to influence a donor's decision whether to contribute.
Therefore, ``misrepresentation of any of these [] categories of
material information is deceptive, in violation of section 5 of the FTC
Act.''\380\
---------------------------------------------------------------------------
\376\ Amended Rule Sec. 310.3(d)(1)-(7).
\377\ USA PATRIOT Act Sec. 1011(b)(1).
\378\ See Cliffdale Assocs., Inc., 103 F.T.C. 110, 165, appeal
dismissed sub nom., Koven v. FTC, No. 84-5337 (11th Cir. 1984).
\379\ See Thompson Med. Co., 104 F.T.C. 648, 818 (1984), aff'd
791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987).
\380\ 67 FR at 4510.
---------------------------------------------------------------------------
In response to the NPRM, some commenters expressed their general
support for the USA PATRIOT Act amendments, which extended the Rule's
coverage to for-profit telemarketers soliciting charitable donations.
AARP, for example, noted its support for the general purposes of the
USA PATRIOT Act, stating that the amendments would
[[Page 4613]]
prevent fraudulent charitable solicitations while still allowing
``legitimate fundraising appeals.''\381\ Similarly, NCL noted that the
new provisions in the TSR regarding for-profit fundraisers will be
``very helpful in curbing deceptive and abusive practices.''\382\
---------------------------------------------------------------------------
\381\ AARP-NPRM at 4.
\382\ NCL-NPRM at 2.
---------------------------------------------------------------------------
Very few comments were received specifically on Sec. 310.3(d) of
the proposed Rule. One such comment, from NCL, noted that ``[t]he
proposed list of prohibited practices covers most of the common abuses
that are reported by consumers and businesses.''\383\ NCL did suggest
adding an additional prohibited misrepresentation on ``sound-alikes,''
or the use of a name similar or identical to that of a legitimate
charity in an attempt to benefit from that charity's good will.\384\
Similarly, Make-A-Wish proposed prohibiting misrepresentations of the
``identity'' of the entity on whose behalf the charitable solicitation
is being sought.\385\ NAAG and NASCO suggested that the Commission
clarify that proposed Sec. 310.3(d)(7), which prohibits
misrepresentations regarding ``[a] seller's or telemarketer's
affiliation with, or endorsement or sponsorship by, any person or
government entity,'' would prohibit misrepresentations of a seller's or
telemarketer's affiliation with any charity.\386\ The Commission
believes that proposed Sec. 310.3(d)(7), renumbered as Sec.
310.3(d)(6) in the amended Rule, is broad enough to prohibit the
``sound-alike'' misrepresentation NCL raised, as well as to prohibit a
misrepresentation regarding one's affiliation with any charity.
Therefore, the Commission declines to add a further misrepresentation
to specifically address the ``sound-alike'' scenario, or add the
``identity'' of the charity to the prohibited misrepresentations.
---------------------------------------------------------------------------
\383\ Id. at 5.
\384\ Id.
\385\ Make-A-Wish-NPRM at 5.
\386\ NAAG-NPRM at 53. See also NASCO-NPRM at 7.
---------------------------------------------------------------------------
NAAG and NASCO also proposed one further modification: the addition
of a prohibited misrepresentation of ``[t]he address or location of the
charitable organization, and where the organization conducts its
activities.''\387\ NAAG stated that the addition of such a provision
would ensure that telemarketers do not misrepresent that the charities
on whose behalf they are soliciting are ``local'' or that their
activities are local, since the local character of a charity or its
programs often is material to prospective donors. According to NAAG,
because many prospective donors prefer to support organizations that
will benefit their own community, fundraisers sometimes take advantage
of that sentiment by using a local post office box or other local
address as their return address, to make it seem as if the charity is
based close to the donors.\388\
---------------------------------------------------------------------------
\387\ NAAG-NPRM at 53.
\388\ Id.
---------------------------------------------------------------------------
The Commission believes that any misrepresentation of the
charitable organization's location, or the location where the funds are
to be used, would likely violate Sec. 310.3(d)(3), which prohibits
misrepresentation of the ``purpose for which any charitable
contribution will be used.'' Therefore, the Commission declines to
include a specific prohibited misrepresentation regarding the address
or location of a charity.
D. Section 310.4 -- Abusive Telemarketing Acts or Practices.
The Telemarketing Act authorizes the Commission to prescribe rules
``prohibiting deceptive telemarketing acts or practices and other
abusive telemarketing acts or practices.''\389\ The Act does not define
the term ``abusive telemarketing act or practice.'' It directs the
Commission to include in the TSR provisions prohibiting three specific
``abusive'' telemarketing practices, namely, for any telemarketer to:
1) ``undertake a pattern of unsolicited telephone calls which the
reasonable consumer would consider coercive or abusive of such
consumer's right to privacy;'' 2) make unsolicited phone calls to
consumers during certain hours of the day or night; and 3) fail to
``promptly and clearly disclose to the person receiving the call that
the purpose of the call is to sell goods or services and make such
other disclosures as the Commission deems appropriate, including the
nature and price of the goods and services.''\390\ The Act does not
limit the Commission's authority to address abusive practices beyond
these three practices legislatively determined to be abusive.\391\
Accordingly, the Commission adopted a Rule that addresses the three
specific practices mentioned in the statute, and, additionally, five
other practices that the Commission determined to be abusive under the
Act.
---------------------------------------------------------------------------
\389\ 15 U.S.C. 6102(a)(1) (emphasis added).
\390\ 15 U.S.C. 6102(a)(3).
\391\ See KENNETH CULP DAVIS & RICHARD J. PIERCE, JR.,
ADMINISTRATIVE LAW TREATISE Sec. 3.2 (3d ed. 1994) (noting that
agencies have the power to ``fill any gaps'' that Congress either
expressly or implicitly left to the agency to decide pursuant to the
decision in Chevron v. Natural Res. Def. Council, 467 U.S. 837
(1984)). It is, therefore, permissible for agencies to engage in
statutory construction to resolve ambiguities in laws directing them
to act, and courts must defer to this administrative policy
decision.
---------------------------------------------------------------------------
Each of the three abusive practices enumerated in the Act
implicates consumers' privacy. In fact, with respect to the first of
these practices, the explicit language of the statute directs the FTC
to regulate ``calls which the reasonable consumer would consider
coercive or abusive of such consumer's right to privacy.''\392\
Similarly, by directing that the Commission regulate the times when
telemarketers could make unsolicited calls to consumers in the second
enumerated item,\393\ Congress recognized that telemarketers' right to
free speech is in tension with consumers' right to privacy within the
sanctity of their homes, but that a balance must be struck between the
two that meshes with consumers' expectations while not unduly burdening
industry. The calling times limitation protects consumers from
telemarketing intrusions during the late night and early morning, when
the toll on their privacy from such calls would likely be greatest. The
third enumerated practice\394\ also relates to privacy, in that it
requires the consumer be given information promptly that will enable
him to decide whether to allow the infringement on his time and privacy
to go beyond the initial invasion. Congress provided authority for the
Commission to curtail these practices that impinge on consumers' right
to privacy but are not likely deceptive under FTC jurisprudence. This
recognition by Congress, that even non-deceptive telemarketing business
practices can seriously impair consumers' right to be free from
harassment and abuse, and its directive to the Commission to rein in
these tactics lie at the heart of Sec. 310.4 of the TSR.
---------------------------------------------------------------------------
\392\ 15 U.S.C. 6102(a)(3)(A) (emphasis added).
\393\ 15 U.S.C. 6102(a)(3)(B).
\394\ 15 U.S.C. 6102(a)(3)(C).
---------------------------------------------------------------------------
The practices not specified as abusive in the Act, but determined
by the Commission to be abusive and thus prohibited in the original
rulemaking are: (1) threatening or intimidating a consumer, or using
profane or obscene language; (2) ``causing any telephone to ring, or
engaging any person in telephone conversation, repeatedly or
continuously with intent to annoy, abuse, or harass any person;'' (3)
requesting or receiving payment for credit repair services prior to
delivery and proof that such services have been rendered; (4)
requesting or receiving payment for recovery services prior to delivery
and proof that such services
[[Page 4614]]
have been rendered; and (5) ``requesting or receiving payment for an
advance fee loan when a seller or telemarketer has guaranteed or
represented a high likelihood of success in obtaining or arranging a
loan or other extension of credit.''
The first two of these are directly consistent with the Act's
emphasis on privacy protection, and with the intent, made explicit in
the legislative history, that the TSR address these particular
practices.\395\ In the SBP for the original Rule, the Commission
stated, with respect to the prohibition on threats, intimidation,
profane and obscene language, that these tactics ``are clearly abusive
in telemarketing transactions.''\396\ The Commission also noted that
the commenters supported this view, and specifically cited the fact
that ``threats are a means of perpetrating a fraud on vulnerable
victims, and [that] many older people can be particularly vulnerable .
. . .''\397\
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\395\ ``With respect to the bill's reference to `other abusive
telemarketing activities' . . . the Committee intends that the
Commission's rulemaking will include proscriptions on such
inappropriate practices as threats or intimidation, obscene or
profane language, refusal to identify the calling party, continuous
or repeated ringing of the telephone, or engagement of the called
party in conversation with an intent to annoy, harass, or oppress
any person at the called number. The Committee also intends that the
FTC will identify other such abusive practices that would be
considered by the reasonable consumer to be abusive and thus violate
such consumer's right to privacy.'' H.R. REP. NO. 103-20 at 8
(1993).
\396\ 60 FR at 30415.
\397\ Id.
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The remaining three abusive practices identified in the Rule--
relating to credit repair services, recovery services, and advance fee
loan services--were included in the Rule under the Telemarketing Act's
grant of authority for the Commission to prescribe rules prohibiting
other unspecified abusive telemarketing acts or practices. The Act
gives the Commission broad authority to identify and prohibit
additional abusive telemarketing practices beyond the specified
practices that implicate privacy concerns,\398\ and gives the
Commission discretion in exercising this authority.\399\
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\398\ 15 U.S.C. 6102(a)(1). The ordinary meaning of ``abusive''
is (1) ``wrongly used; perverted; misapplied; catachrestic;'' (2)
``given to or tending to abuse,''(which is in turn defined as
``improper treatment or use; application to a wrong or bad
purpose''). Webster's International Dictionary, Unabridged 1949.
\399\ 15 U.S.C. 6102(a)(1).
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As noted above, some of the practices prohibited as abusive under
the Act flow directly from the Telemarketing Act's emphasis on
protecting consumers' privacy. When the Commission seeks to identify
practices as abusive that are less distinctly within that parameter,
the Commission now thinks it appropriate and prudent to do so within
the purview of its traditional unfairness analysis, as developed in
Commission jurisprudence\400\ and codified in the FTC Act.\401\ This
approach constitutes a reasonable exercise of authority under the
Telemarketing Act, and provides an appropriate framework for several
provisions of the original Rule. Whether privacy-related intrusions or
concerns might independently give rise to a Section 5 violation outside
of the Telemarketing Act's purview is not addressed or affected by this
analysis.
---------------------------------------------------------------------------
\400\ See Letter from the FTC to Hon. Wendell Ford and Hon. John
Danforth, Committee on Commerce, Science and Transportation, United
States Senate, Commission Statement of Policy on the Scope of
Consumer Unfairness Jurisdiction, appended to Int'l Harvester Co.,
104 F.T.C. 949, 1064 (1984); Letter from the FTC to Hon. Bob
Packwood and Hon. Bob Kasten, Committee on Commerce, Science and
Transportation, United States Senate, reprinted in FTC Antitrust &
Trade Reg. Rep. (BNA) No. 1055, at 568-70 (Mar. 5, 1982); Orkin
Exterminating Co., Inc. v. FTC, 849 F.2d 1354, 1363-68, reh'g
denied, 859 F.2d 928 (11th Cir. 1988), cert. denied, 488 U.S. 1041
(1989).
\401\ 15 U.S.C. 45(n).
---------------------------------------------------------------------------
The abusive practices relating to credit repair services, recovery
services, and advance fee loan services each meet the criteria for
unfairness. An act or practice is unfair under Section 5 of the FTC Act
if it causes substantial injury to consumers, if the harm is not
outweighed by any countervailing benefits, and if the harm is not
reasonably avoidable.\402\ An important characteristic common to credit
repair services, recovery services, and advance fee loan services is
that in each case the offered service is fundamentally bogus. It is the
essence of these schemes to take consumers' money for services that the
seller has no intention of providing and in fact does not provide. Each
of these schemes had been the subject of large numbers of consumer
complaints and enforcement actions,\403\ and in each case caused
substantial injury to consumers. Amounting to nothing more than
outright theft, these practices conferred no potentially countervailing
benefits. Finally, having no way to know these offered services were
illusory, consumers had no reasonable means to avoid the harm that
resulted from accepting the offer. Thus, these practices meet the
statutory criteria for unfairness, and accordingly, the remedy imposed
by the Rule to correct them is to prohibit requesting or receiving
payment for these services until after performance of the services is
completed.
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\402\ Id.
\403\ During 1995 and 1996, the Commission brought or settled
lawsuits against numerous individuals and companies involved in
nearly a dozen recovery room operations. See, e.g., FTC v. Meridian
Capital Mgmt., No. CV-S-96-63-PMP (RLH) (D. Nev. filed Nov. 20,
1996). The Commission's efforts against recovery rooms have borne
fruit. The volume of consumer complaints concerning recovery rooms
logged into the FTC Telemarketing Complaint System in 1996 plummeted
to 153--less than one-fifth the record high volume of 869 complaints
recorded in 1995. See ``1995-1996 Staff Summary of FTC Activities
Affecting Older Americans'' (Mar. 1998). Complaints about
``recovery'' schemes have continued to decline dramatically, from a
number three ranking in 1995 to a number twenty-five ranking in
1999, while complaints about credit repair have remained at a
relatively low level since 1995 (steadily ranking about number
twenty-three or twenty-four in terms of number of complaints
received by the NFIC). NCL-RR at 11. The Commission continues to
take action against fraudulent credit repair schemes; for example,
in August 2000, the FTC, the Department of Justice and forty-seven
other federal, state and local law enforcement and consumer
protection agencies surfed the Web looking for illegal scams that
promise consumers that they can restore their creditworthiness for a
fee. Over 180 websites were put on notice that their credit repair
claims may violate state and federal laws. See ``Surf's Up for Crack
Down on ``Credit Repair'' Scams,'' FTC press release dated Aug. 21,
2000). Unfortunately, complaints about advance fee loan schemes rose
from a number fifteen ranking in 1995 to the number two ranking in
1998, with about 80 percent of the advance fee loan companies
reported to the NFIC located in Canada. NCL-RR at 12. RR Tr. at 378.
The Commission and the state Attorneys General continue to launch
law enforcement ``sweeps'' targeting corporations and ind ividuals
that promise loans or credit cards for an advance fee, but never
deliver them. A sweep was announced June 20, 2000, involving five
cases filed by the FTC, 13 actions taken by state officials, and
three cases filed by Canadian law enforcement authorities. See
``FTC, States and Canadian Provinces Launch Crackdown on Outfits
Falsely Promising Credit Cards and Loans for an Advance Fee,'' FTC
press release dated June 20, 2000. Among the most recent FTC cases
targeting advance fee loans, four involved advance fee credit card
schemes: FTC v. Fin. Servs. of N. Am., No. 00-792 (GEB) (D.N.J.
filed June 9, 2000); FTC v. Home Life Credit, No. CV00-06154 CM (Ex)
(C.D. Cal. filed June 8, 2000); FTC v. First Credit Alliance, No.
300 CV 1049 (D. Conn. filed June 8, 2000); and FTC v. Credit
Approval Serv., No. G-00-324 (S.D. Tex. filed June 7, 2000). In
addition, another case against a fraudulent credit card loss
protection seller also included elements of illegal advance fee
credit card fees. FTC v. First Capital Consumer Membership Servs.,
Inc., Civil No. 00-CV-0905C(F) (W.D.N.Y. filed Oct. 23, 2000).
---------------------------------------------------------------------------
Sec. 310.4(a) -- Abusive conduct generally
Section 310.4(a) of the original Rule sets forth specific conduct
that is considered to be an ``abusive telemarketing act or practice''
under the Rule. None of the comments in the Rule Review recommended
that changes be made to the original wording of Sec. Sec. 310.4(a)(1)-
(3); nor had the Commission's enforcement experience revealed any
difficulty with these provisions that would warrant amendment.\404\
Although one
[[Page 4615]]
commenter suggested amendments to Sec. 310.4(a)(4), the Commission
determined that no amendment was needed to the language of that
provision.\405\ Therefore, the language in these provisions was
unchanged in the proposed Rule.
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\404\ Section 310.4(a)(1) prohibits as an abusive practice
``threats, intimidation, or the use of profane or obscene
language.'' Section 310.4(a)(2) prohibits requesting advance payment
for so-called ``credit repair'' services. Section 310.4(a)(3)
prohibits requesting advance payment for the recovery of money lost
by a consumer in a previous telemarketing transaction.
\405\ Section 310.4(a)(4) prohibits requesting advance payment
for obtaining a loan or other extension of credit when the seller or
telemarketer has represented a high likelihood that the consumer
will receive the loan or credit. NCL reported in its Rule Review
comment that the number of complaints it received about such advance
fee loan schemes had risen steeply in the five years since the Rule
was promulgated. NCL also speculated that consumers may be confused
about whether and under what circumstances fees are legitimately
required for different types of loans, as evidenced by the numerous
complaints about advance fee credit cards. NCL-RR at 11. The
Commission noted in the NPRM its belief that the language of Sec.
310.4(a)(4) already prohibits such advance fee credit card offers
via telemarketing and that numerous federal and state law
enforcement efforts have been directed at such offers. See
discussion at 67 FR at 4510.
---------------------------------------------------------------------------
As noted in the NPRM, however, the Rule amendments mandated by the
USA PATRIOT Act expand the reach of Sec. 310.4(a) to encompass the
solicitation of charitable contributions. The section begins with the
statement ``It is an abusive telemarketing act or practice and a
violation of this Rule for any seller or telemarketer to engage in [the
conduct specified in subsections (1) through (6) of this provision of
the Rule].''\406\ The proposed Rule modified the definitions of
``telemarketing,'' and, by association, ``telemarketer,'' to encompass
the solicitation of charitable contributions. Consequently Sec.
310.4(a) of the proposed Rule would have applied to all telemarketers,
including those engaged in the solicitation of charitable
contributions. Each of the prohibitions in Sec. 310.4(a) will
therefore now apply to those telemarketers soliciting on behalf of
either sellers or charitable organizations. As noted in the NPRM, the
Commission believes it unlikely that Sec. Sec. 310.4(a)(2)-(4) will
have any significant impact on telemarketers engaged in the
solicitation of charitable contributions, since those sections all deal
with practices that are commercial in nature and not associated with
charitable solicitations. Sections 310.4(a)(1), (5), (6), (7) and (8)
of the proposed Rule, however, addressed practices that are not
necessarily confined to telemarketing to induce purchases of goods or
services. They therefore may have had an impact upon telemarketers
engaged in the solicitation of charitable contributions.
---------------------------------------------------------------------------
\406\ Original and amended Rule Sec. 310.4(a).
---------------------------------------------------------------------------
The Commission received many comments discussing the proposed
modifications to Sec. 310.4(a), and significant time was devoted to
these issues at the June 2002 Forum. A summary of the major points on
the record regarding the proposed amendments is provided below.
Sec. 310.4(a)(1) -- Threats and intimidation
Section 310.4(a)(1), unchanged in the proposed Rule, specifies that
it is an abusive telemarketing practice to engage in threats,
intimidation, or the use of profane or obscene language. None of the
comments in response to the NPRM recommended that changes be made to
the wording of Sec. 310.4(a)(1), although ICFA did request
clarification of the term ``intimidation,'' arguing that ``a person
could potentially claim to have been `intimidated' simply because a
pre-need caller suggested meeting to discuss funeral
arrangements.''\407\ The Commission believes that under the language of
the Rule, which focuses on the telemarketer's behavior, to ``engage in
. . . intimidation'' could not reasonably be extended to cover the
situation where a telemarketer merely invites a consumer to discuss
funeral arrangements, even if the person called finds the prospect of
funeral planning an ``intimidating'' one. Rather, as the Commission
noted in the TSR Compliance Guide, this provision is meant to prohibit
``intimidation, including acts which put undue pressure on a consumer,
or which call into question a person's intelligence, honesty,
reliability or concern for family.''\408\ The Commission believes
further clarification is unnecessary, and thus declines to include in
the amended Rule a definition of ``intimidation.'' Therefore, the
language in this provision remains unchanged in the amended Rule.
However, the USA PATRIOT Act expansion of the TSR brings within the
ambit of this provision telemarketers soliciting charitable
contributions.
---------------------------------------------------------------------------
\407\ ICFA-NPRM at 3.
\408\ TSR Compliance Guide at 23 (noting that ``[r]epeated calls
to an individual who has declined to accept an offer may also be an
act of intimidation'').
---------------------------------------------------------------------------
Sec. 310.4(a)(2) -- Credit repair
Section 310.4(a)(2) prohibits requesting or receiving a fee or
consideration for goods or services represented to improve a person's
creditworthiness until: 1) the time frame within which the seller has
represented that the promised services will be provided has expired;
and 2) the seller has provided the consumer with evidence that the
services were successful--that is, that the consumer's creditworthiness
has improved. No change to this section was incorporated in the
proposed Rule, except to note its expanded coverage as a result of the
USA PATRIOT Act.\409\ The only comment received in response to the NPRM
was from DBA, which requested that debt collectors be specifically
exempted from compliance with this section.\410\ As DBA itself noted,
debt collection activities do not fall within the Rule's ambit in any
event because they are outside the definition of
``telemarketing.''\411\ Therefore, it is unnecessary to exempt debt
collectors from compliance with this provision.
---------------------------------------------------------------------------
\409\ 67 FR at 4512 (noting that ``[i]t is unlikely that [this
section] will have any significant impact on telemarketers engaged
in the solicitation of charitable contributions. . .'').
\410\ DBA-NPRM at 2-4.
\411\ Id.
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Sec. 310.4(a)(5) -- Disclosing or receiving, for consideration,
unencrypted consumer account numbers for use in telemarketing
The Commission has added a new provision, Sec. 310.4(a)(5), which
specifies that it is an abusive practice and a violation of the Rule to
disclose or receive, for consideration, unencrypted consumer account
numbers for use in telemarketing.
As mentioned above, since the original Rule was promulgated,
consumer concern over encroachments on their privacy has become
widespread. One response to privacy concerns was passage of the
GLBA\412\ and its related regulations,\413\ under which financial
institutions, and the third parties with which they do business, may
provide consumer account information to other third parties only in
encrypted form for marketing purposes. To do otherwise is not only a
violation of the GLBA and its related regulations,\414\ but is
construed by consumers as a breach of the financial institution's
promise to consumers to keep the consumer's account information
confidential and secure.\415\
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\412\ Gramm-Leach-Bliley Act, see note 64 above.
\413\ See 16 CFR 313.65 (2000) (FTC's Privacy Regulation). See
also 17 CFR 160; 12 CFR 332; 12 CFR 715; 12 CFR 40; 12 CFR 573; and
17 CFR 248.
\414\ See, e.g., 12 CFR 313.12.
\415\ See AARP-Supp. at 2 (describing the results of a survey
AARP conducted in which the majority of consumers reported that they
did not believe telemarketers could or should freely share their
account information). See also Dave Finlayson (Msg. 491) (``I will
cease doing business with any firm which gives out my personal
private information.''); BL (Msg. 1175) (``I also agree that they
should not get a credit card or other account number except from the
consumer who chooses to deal with them. . . . This should include
not SELLING (not just sharing as stated in our newspaper article)
these numbers.''); Anonymous (Msg. 3457) (``This is not what any
reasonable person would consider ``public information.'. . . Why
would ANYONE consider this information that they can ``share''
without the customer's express permission?'').
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[[Page 4616]]
Indeed, trading in unencrypted consumer account numbers has been
uniformly condemned by virtually all parties who participated in this
rulemaking proceeding. Although there was substantial debate regarding
the Commission's proposal for a blanket prohibition on the transfer or
receipt of consumers' billing information (i.e., ``preacquired account
information''),\416\ there was no disagreement among commenters and
forum participants about the notion that trafficking in lists of
consumer account numbers was improper, in many cases illegal, and
should be a violation of the Rule.\417\ As ERA explained during the
forum:
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\416\ Over 50 of the major organizational commenters addressed
the issue of preacquired account telemarketing, as did over 200
consumer commenters. In addition, a session of the June 2002 Forum
was dedicated to the topic, and generated extensive discussion. See
June 2002 Tr. II at 116-212.
\417\ See, e.g., ERA/PMA-Supp. at 14-15; PMA-NPRM at 14; June
2002 Tr. II at 183 (ERA). See also ATA-Supp. at 6; NCTA-NPRM at 12
(``[T]he trafficking of customer account information by unscrupulous
telemarketers is a legitimate concern.''). Also, the GLBA prohibits
this practice on the part of financial institutions. 15 U.S.C.
6802(d); and see, e.g. 12 CFR 313.12.
[I]f there is a transfer of consumer information without knowledge
of and prior to the consumers' consent, which would encompass, for
example, your scenario where a list is compiled and a marketer
[sold] its list with its credit card numbers to another marketer
without telling the consumers on that list that they sold the list
of account numbers, I think everyone at this table would agree . . .
that this is a violation. . . . We've said in our comments that we
would agree to a ban on that. Legitimate marketers don't do that.
They don't sell consumer credit card numbers for money.\418\
---------------------------------------------------------------------------
\418\ June 2002 Tr. II at 183.
Given that there is no legitimate reason to purchase unencrypted
credit card numbers, the Commission believes there is a strong
likelihood that telemarketers who engage in this practice will misuse
the information in a manner that results in unauthorized charges to
consumers. This conclusion is consistent with the Commission's law
enforcement experience.\419\ Consumers cannot avoid the injury because
they likely are unaware that their credit card numbers have been
purchased and that a telemarketer possesses that information when they
receive a telemarketing call. In addition, there is no evidence on the
record of any countervailing benefits to consumers or competition by
trafficking in lists of account numbers. As a result, the Commission
concludes that the practice of selling unencrypted lists of credit card
numbers is likely to cause substantial and unavoidable consumer injury
in the form of unauthorized charges without any countervailing
benefits. Thus, the Commission has determined to add Section
310.4(a)(5). This provision is consistent with the basic prohibition in
the GLBA, and in essence, extends the ban on this practice beyond
financial institutions and ensures that all sellers and telemarketers
subject to the TSR are prohibited from this practice.
---------------------------------------------------------------------------
\419\ See, e.g., FTC v. J.K. Publ'ns, Inc., 99 F. Supp. 2d 1176
(C.D. Cal. 2000) (in which, outside the telemarketing context,
defendant purchased unencrypted lists of consumer account numbers,
which it used to charge consumers, purportedly for visits to adult
websites, despite the fact that many of those charged did not even
own computers). In addition, given the evidence that preacquired
account telemarketing involving encrypted account information can
result in unauthorized charges (as discussed in more detail below),
the Commission believes that there is an even greater likelihood of
consumer injury when telemarketers have purchased consumers' actual
credit card numbers before contacting consumers about an offer.
---------------------------------------------------------------------------
The prohibition in Sec. 310.4(a)(5) is not limited to compilation
and disclosure of lists of account numbers. Rather, any disclosure (or
receipt) of unencrypted account information violates the Rule, unless
the disclosure is for purposes of processing a payment for a
transaction to which the consumer has consented after receiving all
disclosures and other protections of the Rule. A seller or telemarketer
could not, for example, provide or receive account numbers one at a
time in order to circumvent this provision. Nor could a telemarketer
obtain account information from consumers on behalf of one seller, and
then retain it for sale or disclosure to another seller in another
telemarketing campaign.\420\
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\420\ See, e.g., FTC v. Capital Club, No. 94-6335 (D.N.J. 1994).
According to the FTC complaint in that case, two companies, National
Media and Media Arts, which marketed products through infomercials,
allegedly sold or rented their customer lists to third-party service
companies that sold products and services such as memberships in
shopping and travel clubs. The lists contained customers' names,
addresses, and telephone numbers, as well as their credit-card
types, account numbers and expiration dates. The lists were provided
to the service companies without the customers' knowledge or
authorization. Some of the Capital Club defendants' roles included
maintaining the lists, marketing them to the service companies, and
conducting telemarketing calls on behalf of the service companies,
according to the complaint. Industry representatives at the June
2002 Forum registered agreement that the Capital Club scenario would
run afoul of a ban on trafficking in consumer account information.
See June 2002 Tr. II at 193 (ERA) (``[T]hat's exactly the scenario
that we're talking about that would be prohibited because when that
third-party telemarketer retained that account information, it did
so as an agent for the seller, so it was not that telemarketer's
account information to begin with. They were capturing that for the
seller on whose behalf that call was made, so if that telemarketer
were then to call a consumer without knowledge and prior consent and
use that credit card information again, that would be the kind of a
transfer prior to and without consumer consent that we're talking
about.'')
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By ``unencrypted,'' the Commission means the actual account number,
or lists of actual account numbers, or encrypted information with a key
to unencrypt the data.\421\ ``Consideration'' is not limited to cash
payment for a list of account numbers. ``Consideration'' can take a
variety of forms, including receiving a percentage of every ``sale''
using the unencrypted account information.
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\421\ This, too, is consistent with the financial privacy
regulations issued pursuant to the GLBA. See 12 CFR 313.12(c)(1)
(``An account number, or similar form of access number or access
code, does not include a number or code in an encrypted form, as
long as you do not provide the recipient with a means to decode the
number or code.'') (emphasis added).
---------------------------------------------------------------------------
This provision allows processing a properly obtained payment for
goods or services pursuant to a transaction. In addition, pursuant to
the USA PATRIOT Act's expansion of the TSR to cover charitable
solicitations, the provision also allows for the disclosure or receipt
of a donor's account number to process a payment for a charitable
contribution pursuant to a transaction. By ``transaction,'' the
Commission means a telemarketing transaction that complies with all
applicable sections of the Rule, including new Sec. 310.4(a)(6),
discussed below, which prohibits any seller or telemarketer from
causing a charge to be placed against a customer's or donor's account
without that customer's or donor's express informed consent to the
charge.\422\
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\422\ See amended Rule Sec. 310.4(a)(6) and discussion of that
provision, below.
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Sec. 310.4(a)(6) -- Causing a charge to be submitted for payment
without the consumer's express informed consent
In the NPRM, the Commission proposed a prohibition on ``receiving
from any person other than the consumer or donor for use in
telemarketing any consumer's or donor's billing information, or
disclosing any consumer's or donor's billing information to any person
for use in telemarketing.''\423\ This proposed provision was prompted
by extensive comments during the Rule Review concerning the severity
and the scope of harm to consumers related to
[[Page 4617]]
preacquired account telemarketing.\424\ The proposal also arose from
the Commission's law enforcement experience in this area, as well as
that of the states, which demonstrates the consumer harm that can
result from this practice.\425\ The comments received in response to
the NPRM, however, demonstrate that much preacquired account
telemarketing does not necessarily give rise to consumer injury--
specifically, unauthorized charges--and in fact may benefit consumers.
With this in mind, the Commission has focused more narrowly on the
tangible harm, and has crafted precise solutions to the specific abuses
evident in instances involving preacquired account information.
---------------------------------------------------------------------------
\423\ Proposed Rule Sec. 310.4(a)(5), 67 FR at 4543.
\424\ See 67 FR at 4512-14.
\425\ See, e.g., FTC v. Smolev, No. 01-8922 CIV ZLOCH (S.D. Fla.
2001); FTC v. Technobrands, Inc., No. 3:02 cv 00086 (E.D. Va. 2002);
NAAG-NPRM at 30, n.73; Illinois-Supp. passim.
---------------------------------------------------------------------------
Section 310.4(a)(6) of the amended Rule is one of a number of
provisions that collectively address the harm caused by certain forms
of preacquired account telemarketing. The scope of this section,
however, extends beyond the context of preacquired account
telemarketing to any instance where the seller or telemarketer causes a
charge to be submitted for payment without first obtaining the express
informed consent of the customer or donor to be charged, and to be
charged using a particular account or payment mechanism. This
provision, along with several new definitions (amended Rule Sec.
310.2(o) ``free-to-pay conversion,'' Sec. 310.2(t) ``negative option
feature,'' and Sec. 310.2(w) ``preacquired account information''), a
new provision requiring specific disclosures of material information in
any telemarketing transaction involving a negative option feature
(amended Rule Sec. 310.3(a)(1)(vii)), and a new provision prohibiting
misrepresentations regarding any material aspect of a negative option
feature (amended Rule Sec. 310.3(a)(2)(ix)), together are designed to
address in a more narrowly-tailored manner the problem originally
targeted by the blanket prohibition against receiving account
information from any person other than the consumer or disclosing that
information for use in telemarketing.
The blanket prohibition proposed in the NPRM, and the issue of
preacquired account telemarketing generally, received substantial
comment. Consumer groups and law enforcement agencies strongly
supported the proposal, citing continued evidence of substantial
consumer injury resulting from abusive preacquired account
telemarketing practices.\426\ Their comments strongly criticized a
distinctive feature of preacquired account telemarketing--that is, that
it fundamentally changes the customary bargaining relationship between
seller and consumer by giving the seller the means to bill charges to
the consumer's account without the consumer divulging his or her
account number to evidence consent to the transaction.\427\
---------------------------------------------------------------------------
\426\ AARP-NPRM at 6-7; AARP-Supp. at 4; EPIC-NPRM at 9; Horick-
NPRM at 1 (endorsing EPIC's NPRM comment); NAAG-NPRM at 30-41; NCLC-
NPRM at 12-13. See also Covington-Supp. at 2-5; and NCL-NPRM at 6
(``Checks and money orders are no longer the most common methods of
payment in telemarketing complaints made to the NFIC. As NCL noted
earlier, demand drafts, credit cards, debit cards, utility bills,
and other types of accounts are increasingly used for payments.
Sometimes consumers contend that they never provided their account
numbers to the telemarketers; many of these complaints say they
never even heard of the companies before they received their bills
or bank statements.'').
\427\ NAAG-NPRM at 30; NCL-NPRM at 7. See also Covington-Supp.
at 2-5.
---------------------------------------------------------------------------
Industry commenters opposed the proposed provision, making a number
of legal and factual arguments. Several industry members suggested that
without specific legislative authority, the Commission could not
prohibit the transfer of account information under the TSR.\428\ A few
commenters argued that the Commission lacked record evidence sufficient
to support the proposed prohibition.\429\ It bears noting that,
although business and industry representatives acknowledged during the
Rule Review that the practice of preacquired account telemarketing was
quite common, maintaining that it was ``very important'' to them, they
provided scant information that would help to quantify the benefits
conferred by this practice or better explain how these benefits might
outweigh the substantial consumer harm it can cause.\430\ By contrast,
the record of consumer injury arising from preacquired account
telemarketing scenarios was extensive at the time of the Rule
Review.\431\
---------------------------------------------------------------------------
\428\ ATA-NPRM at 18 (arguing that, because the Telemarketing
Act made no reference to preacquired account telemarketing, the
Commission cannot regulate it); Cendant-NPRM at 6 (similar argument
to ATA); CCC-NPRM at 8; DMA-NPRM at 41-42 (arguing that the
Commission lacks authority under Telemarketing Act to establish a
law violation based on unfairness standard); ERA-NPRM at 20 (same
argument as DMA); Green Mountain-NPRM at 29-31; Household Auto-NPRM
at 5; PMA-NPRM at 16 (same argument as DMA and ERA). Contrary to
these assertions, the Commission has the authority to define and
restrict deceptive and abusive telemarketing acts or practices,
pursuant to the Telemarketing Act. Moreover, the Commission has
analyzed proposed Rule provisions addressing abusive practices under
the FTC Act's unfairness standard to narrow, not expand, the scope
of activities brought under the purview of the statute. 67 FR at
4511. The unfairness standard requires that several specific
elements be met before an act or practice may be deemed ``unfair''
under the FTC Act. See 15 U.S.C. 45(n) and discussion of Sec.
310.4(a) above. If anything, the Commission is taking a more
conservative approach in analyzing what constitutes an ``abusive
practice'' than is required under the Telemarketing Act.
\429\ DMA-NPRM at 39, 41; Household Auto-NPRM at 5; MPA-NPRM at
21-22.
\430\ See 67 FR at 4512-14; and June 2002 Tr. II at 211-12 (E.
Harrington) (``One of the reasons that the Commission has proposed a
prohibition is because it looked very carefully at the record of the
request for justification for the practice and found it is sorely
wanting. Why this needs to happen, in other words, has been a real
mystery to us, why it is that companies should be permitted to get
account information from third parties and have it at the time that
they call a prospective customer, charge that account information
and oftentimes not obtain consent for that.'').
\431\ See 67 FR at 4512-14. Moreover, the evidence continues to
mount as the Commission and states continue to bring law enforcement
actions involving these practices. See, e.g., NAAG-NPRM at 30, n.73;
Minnesota-Supp. passim; Illinois-Supp. passim.
---------------------------------------------------------------------------
Three arguments echoed throughout virtually all industry comments
received in response to the NPRM. First, financial institutions, as
well as other industry members, argued that the proposal was
unnecessary or improper in light of the enactment of the GLBA and the
various regulations thereunder.\432\ Specifically, these commenters
argued that the issue of releasing account information for marketing
purposes already has been dispositively addressed in the GLBA and its
implementing regulations, with a different result from that proposed by
the Commission in the TSR.\433\
[[Page 4618]]
Commenters noted that the various privacy regulations under the GLBA
prohibit sharing account numbers with telemarketers, but provide
exceptions for encrypted information, sale of an entity's own product
through an agent, and co-branding and affinity programs. Thus, they
argued, ``since the proposed Rule fails to include these exceptions, it
is inconsistent with the GLBA regulations, rendering the regulations
irrelevant.''\434\ NAAG challenged these arguments, pointing out that
the goals of the GLBA and the TSR are very different. NAAG expressed
the view that the GLBA did not address the economic injury to consumers
caused by preacquired account telemarketing, as it was focused on the
privacy of account information; thus there is no conflict between the
regulations, as they are aimed at different consumer harms.\435\
According to NAAG:
---------------------------------------------------------------------------
\432\ Advanta-NPRM at 3; Allstate-Supp. at 2; ABA-NPRM at 8;
ABIA-NPRM at 1; AFSA-NPRM at 11-12; AmEx-NPRM at 4-5; ATA-Supp. at
5; Assurant-NPRM at 6; BofA-NPRM at 7; Bank One-NPRM at 2-3; Capitol
One-NPRM at 8; Cendant-NPRM at 6-7; CBA-NPRM at 9; Citigroup-NPRM at
8-9; CCC-NPRM at 9; CMC-NPRM at 13; Discover-NPRM at 5-6; E-Commerce
Coalition-NPRM at 2; Eagle Bank-NPRM at 4; FSR-NPRM at 7-8; Fleet-
NPRM at 4-5; Household Auto-NPRM at 5; Household Bank-NPRM at 2, 7-
9; Household Finance-NPRM at 2, 5; HSBC-NPRM at 3; KeyCorp-NPRM at
4; MasterCard-NPRM at 7; MBA-NPRM at 3; MBNA-NPRM at 5; Metris-NPRM
at 2-4; NRF-NPRM at 21; PCIC-NPRM at 2; VISA-NPRM at 6; Wells Fargo-
NPRM at 3; Letter from Reps. Ney, Sandlin, Jones, Cantor, and Shows
to Chairman Timothy Muris, dated Apr. 15, 2002; Letter from Sens.
Hagel, Johnson, and Carper to Chairman Timothy Muris, dated Apr. 17,
2002. See also Letter from Rep. Manzullo to Chairman Timothy Muris,
dated Apr. 12, 2002 (suggesting that the blanket prohibition on
transferring or receiving billing information ``seems excessive'');
and Letter from Sen. Inhofe to Chairman Timothy Muris, dated Mar.
22, 2002 (same).
\433\ ABA-NPRM at 8; BofA-NPRM at 7; Bank One-NPRM at 2-3; CBA-
NPRM at 9; Discover-NPRM at 5. See also CMC-NPRM at 14 ( ``We see no
reason why financial institutions should be subject to any more
stringent rules in connection with the use of consumer information
for telemarketing purposes than for other purposes, and for this
reason, we think the Rule should impose no more stringent limits on
the sharing of billing information than the GLBA and the
Commission's privacy rule impose.'').
\434\ ABA-NPRM at 8. See also ABIA-NPRM at 2 (arguing that the
proposed provision ``would . . . disrupt a coordinated body of
federal and state privacy laws and regulations enacted since passage
of GLBA''); AFSA-NPRM at 11; AmEx-NPRM at 4; BofA-NPRM at 7; Bank
One-NPRM at 3; Cendant-NPRM at 6-7; CMC-NPRM at 13.
\435\ NAAG-NPRM at 41-43.
The essential characteristic of [preacquired account telemarketing]
is the ability of the telemarketer to charge the consumer's account
without traditional forms of consent. . . . The key is how the
agreement between a company controlling access to a consumer's
account and the telemarketer who preacquired the ability to charge a
consumer's account affects the bargaining power between the
telemarketer and the consumer. GLBA and implementing regulations do
not address this relationship. . . . [Indeed as] a result of the
[GLBA and implementing regulations] . . . vendors . . . can still
send through charges to consumers' accounts without consumers giving
their credit card numbers. . . . This allows the same [preacquired
account telemarketing] process to continue. . . .\436\
---------------------------------------------------------------------------
\436\ Id. at 43. Accord Covington-Supp. at 2-5.
Another common theme in industry comments on this issue was that
the use of preacquired account information in telemarketing provides
protection for consumers from identity theft perpetrated by individual
telemarketing agents, and assuages consumers' concerns about divulging
their account information.\437\ According to one such commenter, having
consumers provide billing information over the telephone:
---------------------------------------------------------------------------
\437\ ABA-NPRM at 8; AmEx-NPRM at 5; Assurant-NPRM at 4; BofA-
NPRM at 7; Bank One-NPRM at 3-4; Capital One-NPRM at 9; Cendant-NPRM
at 7; Household Auto-NPRM at 2, 5; Household Bank-NPRM at 2, 7;
Household Finance-NPRM at 2, 7; MasterCard-NPRM at 7; MPA-NPRM at
24; Metris-NPRM at 2, 5-7; NRF-NPRM at 20; Time-NPRM at 8-9; VISA-
NPRM at 6-7; Wells Fargo-NPRM at 3. See also June 2002 Tr. II at
124-25 (CCC); Id. at 133 (PMA) and 194-95 (DialAmerica).
will actually operate to introduce account numbers into broader
circulation. As customers provide account numbers, employees of
telemarketers, processors and others in the distribution chain may
have access to them. This practice will actually increase the
chances for unauthorized use. . . . Sophisticated encryption
processes keep account numbers out of circulation, and out of the
hands of potential unauthorized users.\438\
---------------------------------------------------------------------------
\438\ AmEx-NPRM at 8. Accord Assurant-NPRM at 5; Bank One-NPRM
at 3-4. Additionally, several commenters suggested that the blanket
prohibition was ``inconsistent with the longstanding and well
considered advice [of the Commission and other consumer protection
groups and law enforcement agencies] that they not release their
account numbers to telemarketers. . . .'' MasterCard-NPRM at 7.
Accord BofA-NPRM at 7; Bank One-NPRM at 3. See also ABA-NPRM at 8;
Metris-NPRM at 6. In fact, the Commission's advice has not been to
refuse to divulge account information in any telemarketing
transaction, but rather only to divulge such information when the
seller is known to the consumer. See, e.g., ``Facts for Consumers:
Are You a Target of ... Telephone Scams,'' http://www.ftc.gov/bcp/confine/pubs/tmarkg/target.htm
; and ``Consumer Alert: Customized
Cons Calling,'' http://www.ftc.gov/bcp/confine/pubs/alerts/consalrt.htm.
Moreover, the reason for this advice is not to avoid
identity theft, but to protect consumers from fraudulent
telemarketers selling bogus goods or services. Id. In the identity
theft context, the danger identified by the Commission and discussed
in its publications is not the potential misuse of account
information that a consumer has provided in the course of a sale of
goods or services, but rather ``pretexting''--i.e., the practice of
eliciting a consumer's personal information under false pretenses,
such as claiming to be from the consumer's bank, calling to confirm
the consumer's account information. See ``Pretexting: Your Personal
Information Revealed,'' http://www.ftc.gov/bcp/confine/pubs/credit/pretext.htm
.
A number of commenters pointed out that the GLBA implementing
regulations assume the confidentiality benefits of transferring
encrypted account information so that consumers would not have to
provide such information during the marketing transaction.\439\ Other
commenters noted some contradiction in industry's identity theft
argument, suggesting it is illogical to assert that a telemarketer
cannot be trusted with a consumer's account information, but that same
telemarketer can be trusted to tell the seller truthfully that the
consumer has provided express informed consent to the purchase, absent
obtaining any part of the account number from the consumer.\440\ One
such commenter further suggested that the best protection against
individual telemarketers perpetrating identity theft is proper
screening, training, monitoring and supervision of salespeople.\441\ In
addition, the vast majority of non-cash transactions in both
telemarketing and face-to-face retail situations entail the consumer's
disclosure of his or her account number to the seller's
representative.\442\ The record does not reveal any reason to support
the notion that the risk of identity theft is any different in these
transactions than in transactions where the seller has opted to make
use of preacquired account information.
---------------------------------------------------------------------------
\439\ Bank One-NPRM at 4; Cendant-NPRM at 7; Household Auto-NPRM
at 2-3; Metris-NPRM at 5; E-Commerce Coalition-NPRM at 3; VISA-NPRM
at 6-7.
\440\ June 2002 Tr. II at 130-31 (AARP), 143 (NAAG), and 205
(NCL). Indeed, in both their Rule Review and NPRM comments, NAAG
provided several examples of instances where obviously confused
elderly consumers were charged for products or services using
preacquired account information, despite no clear evidence of
consent during the telemarketing call. NAAG-RR at 11 and Exs. 2 - 4
attached thereto; NAAG-NPRM at 32, and Ex. B attached thereto. See
also Synergy Global-NPRM at 1-2 (comments from a former teleservices
agent stating that he was encouraged by his superiors to ``falsify
sales in an attempt to artificially inflate the statistics compiled
nightly'').
\441\ NCL-NPRM at 7.
\442\ NAAG-RR at 10. Indeed, NEMA described its own current
procedures, under the Uniform Business Practices guidelines created
for the retail energy market, whereby it obtains complete billing
information directly from each customer as proof of the customer's
intent to switch utility providers. NEMA-NPRM at 8-9.
---------------------------------------------------------------------------
The third recurring theme in industry comments on this issue was
the existence of a variety of efficiencies for both sellers and
consumers. Among the most common examples cited was avoiding error in
the transmission of account numbers from consumer to telemarketer, as
either the consumer misstates or the telemarketer miskeys the account
number.\443\ Another benefit cited by numerous industry commenters was
the reduction of time on the telephone to complete the transaction in
the initial call,\444\ particularly in
[[Page 4619]]
upsells.\445\ As DMA noted, ``it is a significant benefit to consumers
for second businesses in an upsell to obtain and use information such
as address and credit card information. This eliminates the need for a
consumer to have to restate the information just provided. Transfer of
information in such scenarios with informed consent is inherently
efficient for both the merchant and the consumer.''\446\ The final
benefit cited in several comments was that preacquired account
telemarketing helped consumers by enabling them to avoid the
inconvenience of having to pull out their wallets in order to make a
purchase.\447\ This alleged benefit was sharply questioned by consumer
advocates, who argued that whatever time savings or convenience may
accrue from the use of preacquired account information does not offset
the potential harm from its use.\448\ The record makes clear, in fact,
that it is the very act of pulling out a wallet and providing an
account number that consumers generally equate with consenting to make
a purchase, and that this is the most reliable means of ensuring that a
consumer has indeed consented to a transaction.\449\
---------------------------------------------------------------------------
\443\ ABA-NPRM at 8; Assurant-NPRM at 3-4; BofA-NPRM at 7;
Cendant-NPRM at 7; Cox-NPRM at 33; Metris-NPRM at 7.
\444\ See, e.g., MPA-NPRM at 24 (``The Commission must also not
underestimate the economic efficiencies such practices afford to
businesses. . . . It is estimated that requiring consumers to
retrieve and repeat their entire account number and verifying this
information will increase the length of the call substantially, with
one provider estimating an increase of 35 seconds and additional
evidence suggesting that increase could be 60 seconds or more.'')
See also Cox-NPRM at 33; Metris-NPRM at 6-7; NCTA-NPRM at 12;
Tribune-NPRM at 8. MPA's argument on this point is somewhat
contradicted by its recommended alternative to the prohibition,
express verifiable authorization, which involves additional expense,
regardless of the method of express verifiable authorization
selected. See MPA-NPRM at 26-29. NCL challenged this proposition,
suggesting that, on the contrary, ``[r]equiring telemarketers to ask
for [the consumer's account number] would benefit both parties by
helping to confirm a consumer's intention to make the purchase and
the correct account that will be used for that purchase, reducing
the potential for billing disputes later.'' NCL-NPRM at 7.
\445\ Associations-Supp. at 5-6; DMA-NPRM at 40. See also PMA-
NPRM at 18-19; Time-NPRM at 8.
\446\ DMA-NPRM at 40. See also Time-NPRM at 8.
\447\ Assurant-NPRM at 6; June 2002 Tr. II at 125 (CCC).
\448\ See, e.g., June 2002 Tr. II at 131 (AARP) (``To imply that
. . . it's more inconvenient for the consumer to get their credit
card than to have an unknown source debit their account without
their knowledge, I don't think any consumer would ever agree with
that statement.'')
\449\ Covington-Supp. at 2-5:
``The Commission is also correct that the best way to be certain
that a consumer really wants to make a purchase is to see if the
consumer is willing to reach into a purse or pocket, open a wallet,
take out a credit card, and read from it. When that happens, there
is nothing ambiguous about what's taking place; there can be no
misunderstanding. . . . Even during a chaotic dinner hour, a
consumer cannot open a wallet, pull out a credit card, and read from
it without knowing that he or she is making some kind of purchase. .
. . This short-hand method for consumers to signal assent to a deal
leaves complete control of the transaction in the hands of the
consumer while preventing the industry burden from being any greater
than necessary.''
Indeed, this conclusion derives from the actual experience of a
telemarketing firm that engages in preacquired account
telemarketing. See Letter from Stephen Calkins to the FTC, dated
October 28, 2002 (``Calkins Letter''). This firm attempted to cure
the high customer return rates generated by this practice in several
ways, including adjusting the disclosures and reading at least four
digits of the account number to the consumers during the call. Id.
at 2. The firm found that none of these attempted cures ensured that
consumers ``knowingly consented'' to the purchase while maintaining
a competitive level of sales. Id. at 1-2. Only when the firm began
requesting a portion of the account number from the consumer herself
did complaint rates drop significantly, without an unacceptable drop
in sales. According to the commenter, ``Sales were about 25% lower
than when the telemarketer read those digits to the consumer, but
consumers really understood that they were making purchases . . . .
My client believes that consumer complaints pertaining to their
intent to purchase dropped, and that his seller clients now
experience an acceptable level of product returns.'' Id. at 2-3. See
also June 2002 Tr. II at 139-44 (NAAG); NACAA-NPRM at 6 (``That the
consumer has to provide this information to the seller provides a
check on the transaction, and an assurance that the consumer does
indeed wish to enter the transaction.''); Vermont-Supp. passim and
attachment. AARP commissioned a survey by telephone on June 14-19,
2002, among a nationally representative sample of 1,240 respondents
18 years of age and older. Participants were asked a handful of
questions, such as, ``Often telemarketers ask you to buy something
with a credit card or debit card. Do you think telemarketers are
able to cause charges to your credit card or debit card without
getting your credit or debit card numbers directly from you?'' Only
30 percent of respondents stated that they were aware that
telemarketers have the ability to cause a charge to their credit or
debit card accounts without getting the account numbers from them.
AARP-Supp. at 2. That number was higher in the instance of upsells,
but still less than half of the respondents understood that it was
possible to be charged without providing account information to a
seller or telemarketer. Id. Additionally, the majority (80 percent)
of respondents stated that they thought telemarketers should only be
able to cause charges to their credit or debit card accounts if the
consumers expressly provide their account numbers to the seller or
telemarketer. Id. at 4; Vermont-Supp. at 2-3. The survey addresses a
fairly complex issue in broad terms. For example, it does not tease
out the specific instances where a consumer might actually have an
expectation that the seller will retain and reuse the consumer's
account information, such as the contact lens seller who, with the
consumer's permission, retains the consumer's account information to
facilitate quarterly lens purchases. The results do, however,
provide insight into the general expectations of consumers when
engaging in telemarketing transactions.
---------------------------------------------------------------------------
As it stated in the NPRM, the Commission still believes that
whenever preacquired account information enables a seller or
telemarketer to cause charges to be billed to a consumer's account
without the necessity of persuading the consumer to demonstrate his or
her consent by divulging his or her account number, the customary
dynamic of offer and acceptance is inverted. In such a case, what is
customarily under the sole control of the consumer--whether to divulge
one's account number, thereby determining whether to accept the offer
and how to pay for it--is now in the hands of the seller or
telemarketer.\450\ This reversal in the traditional paradigm is not one
that is generally expected or favored by consumers, who consistently
state that, as a general proposition, they do not believe it is or
should be possible for them to be charged if they do not provide their
account number in a transaction.\451\ The Commission understands this
to mean that, generally speaking, consumers believe they ordinarily
signal their consent to an offer by providing their account information
to the seller or telemarketer.
---------------------------------------------------------------------------
\450\ State law enforcers, consumers and consumer groups, as
well as some industry members, consistently voiced concerns over the
shift of control over a transaction from the consumer to the seller
or telemarketer, and noted consumer disbelief that purchases could
actually be made without their ever disclosing payment information.
See 67 FR at 4513; June 2002 Tr. II at 130-32 (AARP); Covington-
Supp. at 2, 5; EPIC-NPRM at 9; NAAG-RR at 10-11; NAAG-NPRM 30-31;
June 2002 Tr. II at 139-44 (NAAG). But see CMC-NPRM at 13
(questioning this proposition).
\451\ See 67 FR at 4513; AARP-Supp. at 4 (see note 449 above,
describing survey showing that the majority of consumers do not
believe their accounts can, or should, be charged by telemarketers
without obtaining the account number directly from the consumers);
June 2002 Tr. II at 131-32 (AARP); EPIC-NPRM at 9; NAAG-RR at 10-11;
NAAG-NPRM 30-31; Vermont-Supp. at 2-3. As Minnesota explained during
the June 2002 Forum:
``In a preacquired situation, the consumer doesn't have that
control because we have shorthand ways of signaling consent in our
society. We aren't many lawyers out there. Josh, who . . . has a
trade school degree and comes home from a job and Esther is sitting
on the couch at 85 years old doesn't understand all this. . . . They
just get a call from somebody. What they know is I've got to sign my
name, I've got to give somebody my credit card or in the context of
a telemarketing transaction, I have to read my account number to the
person or I have to pay cash, and what this does is by circumventing
those forms of consent, it makes it impossible for consumers to
control the transactions.''
June 2002 Tr. II at 140. See also James Andris (Msg. 171) (``Our
mortgage company has been deducting a monthly premium, via our
mortgage payment, to a 3rd party insurance policy. I have written a
letter demanding refunds for the payments for 16 months. We, my wife
and I, never gave written or verbal permission for such payments to
either parties [sic].''); Albert Bruce Crutcher (Msg. 229) (``I also
favor not allowing my credit card and account numbers to be given
out by anyone other than ME!!''); Harold D. Howlett (Msg. 300) (``Do
not allow telemarketers to obtain and use credit card or other
account information from anyone except the consumer. . . .'');
Carole & Cory Walker (Msg. 810) (``Every year we have at least one
unauthorized charge to our card and we are extremely cautious with
our information.'').
---------------------------------------------------------------------------
Although some commenters argue that this shift in the normal
paradigm of offer and acceptance is, in and of itself, inherently
unfair,\452\ the record overall suggests that, in general, it is not
preacquired account telemarketing per se that is harmful, but rather
the abuse of preacquired account information that causes the harm.\453\
Commenters persuasively note that there are many transactions involving
preacquired account information that are beneficial to, indeed
sometimes expected by, consumers. For example, as noted in the NPRM,
``a customer who places
[[Page 4620]]
quarterly orders for contact lenses by calling a particular lens
retailer may provide her billing information in an initial call, with
the understanding and intention that the telemarketer will retain it so
that, in any subsequent call, the retailer has access to this billing
information.''\454\ Similarly, a customer who provides his account
number to make a purchase in an initial telemarketing transaction may
be frustrated to have to repeat that account information to consummate
certain upsell transactions, particularly when the upsell is offered by
the same telemarketer. In that case, there may be an expectation that
the telemarketer will have retained, and be able to reuse, the account
information the customer provided only moments ago.\455\ As another
commenter pointed out during the Rule Review, the key to such
transactions is the fact that the consumer makes the decision to supply
the billing information to the seller, and understands and expects that
the information will be retained and reused for an additional purchase,
should the consumer consent to that purchase.\456\
---------------------------------------------------------------------------
\452\ See, e.g., EPIC-NPRM at 9; NAAG-NPRM at 30; NCL-NPRM at 6-
7.
\453\ ERA-NPRM at 16; Household Auto-NPRM at 5; PMA-NPRM at 17.
Other commenters asserted that using preacquired account information
is not inherently fraudulent. See Allstate-Supp. at 2; Associations-
NPRM at 4; ATA-NPRM at 19; ATA-Supp. at 5-6; ERA/PMA-Supp. at 10;
ITC-NPRM at 5; NCTA-NPRM at 11; Noble-NPRM at 3; NATN-NPRM at 3;
NSDI-NPRM at 3; PMA-NPRM at 13-16; Technion-NPRM at 4; TRC-NPRM at
3; Time-NPRM at 7.
\454\ 67 FR at 4513.
\455\ See, e.g., June 2002 Tr. II at 196 (Time) (``[T]he catalog
clients that we deal with that are . . . selling our magazines on
our behalf . . . tell us that the cost would be loss of sales of the
catalog products because the customers would just be so annoyed
about having to give the credit card number again that they just
gave.'')
\456\ 67 FR at 4513, n.196.
---------------------------------------------------------------------------
The record shows that the specific harm resulting from the use of
preacquired account telemarketing is manifested in unauthorized
charges.\457\ These may appear not only on consumers' credit card or
checking accounts, but also on mortgage statements and other account
sources not traditionally used to pay for purchases.\458\ Of course,
unauthorized charges are not exclusively associated with preacquired
account telemarketing. The Commission has brought numerous law
enforcement actions against sellers and telemarketers alleging
violations of the FTC Act for the unfair practice of billing
unauthorized charges to consumers' accounts in a variety of contexts
not involving preacquired account information, including but not
limited to: advanced fee credit card offers,\459\ sweepstakes,\460\
vacation or travel packages,\461\ credit card loss protection
offers,\462\ and magazine subscriptions.\463\ Thus, in essence,
preacquired account telemarketing has proven in certain circumstances
to be an additional, but not the only, vehicle for imposing
unauthorized charges on consumers in telemarketing transactions.
---------------------------------------------------------------------------
\457\ In its supplemental comment, Minnesota argued that
evidence gathered in its law enforcement actions showed that
consumers consistently stated that they had not authorized charges
arising out of preacquired account telemarketing, particularly when
the offers involved ``free-to-pay conversion'' features:
``The data we have reviewed in our investigations uniformly
supports our impression that underlying the high cancellation rates
with preacquired account telemarketing is consumer sentiment that
the charges were unauthorized. In addition to the survey of Fleet
Mortgage Corporation customer service representatives presented in
the prior NAAG Comments [see NAAG-NPRM at 31-32], an investigation
of a subsidiary of another of the nation's largest banks revealed a
similar pattern. During a thirteen month period, this bank processed
173,543 cancellations of membership clubs and insurance policies
sold by preacquired account sellers. Of this number of
cancellations, 95,573, or 55 percent, of the consumers stated
unauthorized billing as the reason for the request to remove the
charge. The other primary reason given for canceling (by 56,794
customers, or 32% of the total) was a general ``request to cancel''
code that may have also included many consumers claiming
unauthorized charges.''
Minnesota-Supp. at 4.
\458\ NAAG-NPRM at 31 (``Fleet Mortgage Corporation, for
instance, entered into contracts in which it agreed to charge its
customer-homeowners for membership programs and insurance policies
sold using preacquired account information. If the telemarketer told
Fleet that the homeowner had consented to the deal, Fleet added the
payment to the homeowner's mortgage account.'')
\459\ See, e.g., FTC v. Corporate Mktg. Solutions, No. CIV-02
1256 PHX RCB (D. Ariz. filed July 8, 2002); FTC v. Capital Choice,
No. 02-21050-CIV-Ungaro-Benages (S.D. Fla. filed Apr. 15, 2002); FTC
v. Fin. Servs. of N. Am., No. 00792 (GEB) (D.N.J. filed June 9,
2000); FTC v. SureCheK Sys., Inc., No. 1:97-CV-2015-JTC (N.D. Ga.
filed July 9, 1997); FTC v. Thornton Communications, Inc., No. 1 97-
CV-2047 (N.D. Ga. filed July 14, 1997).
\460\ See, e.g., FTC v. New World Servs., Inc., No. CV-00-625
(GLT) (C.D. Cal. filed July 5, 2000); FTC v. Hold Billing, Ltd., No.
SA-98-CA-0629-FB (W.D. Tex. filed July 15, 1998).
\461\ See, e.g., FTC v. Lubell, No. 3-96-CV-80200 (S.D. Iowa
filed Dec. 1996); FTC v. Disc. Travel, No. 88-113-CIV-FtM-15C (M.D.
Fla. filed Aug. 8, 1988); Citicorp Credit Servs., 116 F.T.C. 87
(1993).
\462\ See, e.g., FTC v. Andrews, No. 6:00-CV-1410-ORL-28-B (M.D.
Fla. filed Oct. 2000); FTC v. First Capital Consumer Membership
Servs., No. 00 CV 0905C(F) (W.D.N.Y. filed Oct. 23, 2000); FTC v.
Consumer Repair Servs., Inc., No. 00-11218 CM(RZx) (C.D. Cal. filed
Oct. 23, 2000); FTC v. Capital Card Servs., No. CV 00 1993 PHX EHC
(D. Ariz. filed Oct. 23, 2000); FTC v. Forum Mktg. Servs., No.
00CV0905C(F) (W.D.N.Y. filed Oct. 26, 2000); FTC v. 1306506 Ontario,
Ltd., No. 00-CV-906 (W.D.N.Y filed Oct. 23, 2000); FTC v. OPCO Int'l
Agencies, Inc., No. CO1-2053R (W.D. Wash. filed Feb. 2001).
\463\ See, e.g., FTC v. Diversified Mktg. Servs. Corp., No.
1:96-CV-615-FM. (W.D. Okla. filed Mar. 12, 1996); FTC v. Windward
Mktg., No. 1:9 6-CV-615-FM. (N.D. Ga. filed May 26, 1996); FTC v.
S.J.A. Soc'y, No. X97 0061 (E.D. Va. filed May 1997).
---------------------------------------------------------------------------
One of the problems, therefore, with the proposed prohibition on
receiving billing information from a source other than the consumer or
sharing it with others for the purposes of telemarketing is that it
fails to remedy patterns of unauthorized billing that occur even though
preacquired account information is not used. As our cases amply
demonstrate, the practice unequivocally meets the criteria for
unfairness, and therefore violates Section 5 of the FTC Act.\464\ Yet
until now, the Rule has not specified that unauthorized billing is an
abusive practice and a Rule violation.\465\ The Commission therefore
has decided to add Sec. 310.4(a)(6) to correct that deficiency. The
new provision specifies that it is an abusive practice and a violation
of the Rule to cause a charge to be submitted for payment, directly or
indirectly, without the express informed consent of the customer or
donor. This prohibition is not limited to instances of unauthorized
charges resulting from preacquired account telemarketing. Rather, this
provision is applicable whenever a seller or telemarketer subject to
the Rule causes a charge to be submitted against a customer's or
donor's account without obtaining the customer's or donor's express
informed consent to do so. This broader prohibition on unauthorized
billing is supported by the Commission's extensive law enforcement
record of instances of unauthorized billing in telemarketing
transactions.
---------------------------------------------------------------------------
\464\ See discussion and note 400 above of Sec. 310.4
generally, and 67 FR at 4511, regarding the Commission's
determination that, in specifying practices as abusive when they do
not directly implicate the privacy concerns embodied in the
Telemarketing Act, it will demand that the practice meet the
criteria for unfairness codified in Sec. 5(n) of the FTC Act, 15
U.S.C. 45(n).
\465\ Section 310.3(a)(4) specifies that it is a deceptive
practice to make ``a false or misleading statement to induce any
person to pay for goods or services.''
---------------------------------------------------------------------------
Section 310.4(a)(6) also specifies that, in every transaction, the
seller or telemarketer must obtain the consumer's express informed
consent to be charged for the goods or services or charitable
contribution, and to be charged using the identified account.
``Express'' consent means that consumers must affirmatively and
unambiguously articulate their consent. Silence is not tantamount to
consent; nor does an ambiguous response from a consumer equal
consent.\466\ Consent is ``informed'' only when customers or donors
have received all required material disclosures under the Rule, and can
thereby gain a clear understanding that they will be charged, and of
the payment mechanism that will be used to effect the charge. Of
course, the best evidence of ``consent'' is consumers' affirmatively
stating that they do agree to purchase the goods or services (or make
the donation), identifying the account they have selected to make the
purchase, and providing part or all of that account number to the
seller or
[[Page 4621]]
telemarketer for payment purposes (not for purposes of
``identification,'' or to prove ``eligibility'' for a prize or offer,
for example). But in most instances, the Commission leaves it up to
sellers to determine what procedures to employ in order to meet the
requirement for obtaining express informed consent. As explained below,
however, in certain particularly problematic scenarios, the Commission
does impose specific procedures.
---------------------------------------------------------------------------
\466\ See Electronic Retailing Association, GUIDELINES FOR
ADVANCE CONSENT MARKETING, http://www.retailing.org/regulatory/publicpolicy_consent.html
(``ERA Guidelines'').
---------------------------------------------------------------------------
Having treated the overall problem of unauthorized billing in new
Sec. 310.4(a)(6), the Commission has included additional subsections
to address problems particularly associated with preacquired account
telemarketing. As noted in the NPRM, evidence shows that, at least to
date, unquestionably the greatest risk of harm (i.e., unauthorized
charges) to consumers is associated with telemarketing involving the
combination of preacquired account information with an offer involving
a ``free-to-pay conversion.''\467\ NAAG describes the ``free-to-pay
conversion'' offer (which it refers to as an ``opt-out free trial''
offer) as the ``constant companion'' of the preacquired account
telemarketer in state law enforcement efforts to date.\468\ Indeed, as
of the date of this notice, all of the law enforcement actions taken by
the Commission and by the states that involved telemarketing using
preacquired account information also involved an offer with a ``free-
to-pay conversion'' feature.\469\
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\467\ The Commission has inserted a definition of ``free-to-pay
conversion'' at Sec. 310.2(o) of the amended Rule, which states
that ``free-to-pay conversion'' means: ``in an offer or agreement to
sell or provide any goods or services, a provision under which a
customer receives a product or service for free for an initial
period and will incur an obligation to pay for the product or
service if he or she does not take affirmative action to cancel
before the end of that period.'' See discussion of Sec. 310.2(o)
above.
\468\ NAAG-NPRM at 32. Accord AARP-NPRM at 6. CCC attempted to
counter this finding by presenting the results of a survey,
conducted on behalf of MemberWorks, in April of 2001 by the Luntz
Research Companies (the ``Luntz Survey''). CCC-NPRM at 10; June 2002
Tr. II at 127; MemberWorks-Supp. passim. In the survey, the caller
told the consumer that the caller would read an offer, and would ask
for the consumer's reaction. So, it was clear to the consumer that
he or she was not buying anything, and instead that the consumer
should listen carefully to the terms of the offer so that he or she
could answer the caller's questions. Then, the caller read a script
involving a ``free-to-pay conversion'' feature (the script was not
submitted with the survey results for the public record). The caller
then asked several questions about what the consumer just heard. CCC
argued that the results of this survey showed that 85 percent of the
respondents said the billing methods were understandable, and that
the seller was acting fairly. CCC-NPRM at 10. Examination of the
Luntz survey in greater detail suggests that the survey does little
to support these assertions. First, in fact, none of the respondents
said that the billing methods were understandable. According to the
survey, 52 percent of the respondents said the billing methods were
``mostly'' understandable, while 33 percent said they were
``somewhat'' understandable, and 13 percent said they were not
understandable. This means that at least 46 percent of the
respondents did not even ``mostly'' understand the way in which they
would be billed after listening carefully to a sales offer involving
preacquired account information and a ``free-to-pay conversion''
feature. See MemberWorks-Supp. at 1. In addition, after asking
whether the billing methods were understandable, the callers asked
two questions structured in ways that strongly suggested the desired
result: first they asked, ``And if you agree to join, and receive a
welcome kit with all of the rules in writing, who is responsible if
you forget to cancel and are billed,'' then ``If the company tells
you three times on the telephone call and then tells you twice in
writing that you can cancel your program membership anytime, but if
you don't cancel, you will be charged, is the company acting fairly
or not.'' Id. (emphasis added). Moreover, regardless of the merits
of the survey results, they do little to offset the extensive
evidence of consumer injury from this practice, the continuing flow
of complaints into the offices of consumer groups and law
enforcement officials at both the state and federal levels, and the
AARP survey evidence of consumer perceptions and opinions about
preacquired account telemarketing. See notes 424-25 and 449 above.
\469\ For example, MemberWorks, Inc. (Assurances of
Discontinuance with the States of Nebraska and New York; Consent
Judgments with the States of California and Minnesota) (primarily
``free-to-pay conversion'' membership clubs); BrandDirect Mktg.
Corp. (Assurances of Discontinuance with the States of Connecticut
and Washington) (``free-to-pay conversion'' membership clubs);
Cendant Membership Servs. (Consent Judgment with State of Wisconsin)
(same); Signature Fin. Mktg. (Assurance of Discontinuance with State
of New York) (same); Damark Int'l, Inc. (Assurances of
Discontinuance with States of Minnesota and New York) (``free-to-pay
conversion'' buyers club); Illinois v. Blitz Media, Inc., No. 2001-
CH-592(Sangamon County) (``free-to-pay conversion'' membership
club); New York v. Ticketmaster and Time, Inc. (Assurance of
Discontinuance) (``free-to-pay conversion'' magazine subscription);
Triad Discount Buying Service (sued by 29 states and the Commission)
(``free-to-pay conversion'' membership clubs); Minnesota v. U.S.
Bancorp, Inc., No. 99-872 (Consent Judgment, D. Minn) (account
information provider to seller/telemarketer of ``free-to-pay
conversion'' membership/buyers clubs); Minnesota v. Fleet Mortgage
Corp., 158 F. Supp. 2d 962 (D. Minn. 2001) (same, plus insurance
packages); FTC v. Technobrands, Inc.; No. 3:02-cv-00086 (E.D. Va.
2002) (``free-to-pay conversion'' membership clubs); U.S. v.
Prochnow, No. 1:02-cv-917-JLF (N.D. Ga. 2002) (inbound calls from
direct mail solicitations, upsold ``free-to-pay conversion''
membership clubs).
---------------------------------------------------------------------------
It is noteworthy that the coupling of preacquired account
information with a ``free-to-pay conversion'' offer is not limited to
outbound telephone calls. In FTC v. Smolev,\470\ for example, the
defendants were alleged to have lured consumers to call by offering an
inexpensive lighting product in general media advertisements, obtaining
account information from the consumer in the initial transaction, and
then upselling a ``free-to-pay conversion'' buyers club
membership.\471\ In fact, the majority of companies that have been
targeted by state or FTC law enforcement action market their ``free-to-
pay conversion'' products or services via upsells, sometimes
exclusively, and other times also using outbound telephone calls.\472\
---------------------------------------------------------------------------
\470\ (a/k/a Triad Disc. Buying Serv.) No. 01-8922 CIV ZLOCH
(S.D. Fla. 2001).
\471\ Thus, the assertion of some commenters that ``the
potential for abuse or confusion as to where the [account]
information was obtained does not exist in upsells,'' see, e.g.,
ANA-NPRM at 6, is not supported by the record, at least in the
context of offers with a ``free-to-pay conversion'' feature, as was
the case in Smolev.
\472\ Unfortunately, the argument made by several commenters
that the abusive use of preacquired account information is limited
to a discrete number of bad actors (see ATA-NPRM at 19; ERA-NPRM at
16; MPA-NPRM at 23-24) is not supported by the record. Law
enforcement actions alleging injuries caused by abuses of
preacquired account telemarketing have been brought against well-
known, national companies and financial institutions, including but
not limited to: U.S. Bancorp, Fleet Mortgage Corporation,
MemberWorks, Ticketmaster, and Time. See NAAG-NPRM at 30, n.73.
---------------------------------------------------------------------------
Consequently, the Commission has determined that in any transaction
involving both preacquired account information and a ``free-to-pay
conversion,'' the evidence of abuse is so clear and abundant that
comprehensive requirements for obtaining express informed consent in
such transactions are warranted.\473\ Specifically, Sec.
310.4(a)(6)(i) provides that a seller or telemarketer making an offer
involving both preacquired account information and a ``free-to-pay
conversion'' must (1) obtain from the customer, at a minimum, the last
four digits of the account number to be charged; (2) obtain from the
customer his or her express agreement to be charged for the goods or
services and to be charged using the account for which the consumer
provided the four digits; and (3) make and maintain an audio recording
of the entire telemarketing transaction. Thus, in every instance where
the combination of preacquired account information and ``free-to-pay
conversion'' is involved in a telemarketing transaction, the customer
must be required to reach into his or her wallet, and provide at least
a portion of the account number to be charged.\474\ It
[[Page 4622]]
must be clear that the customer is providing that account number to
authorize a purchase. This means that, at a minimum, the disclosures
required in Sec. 310.3(a)(1) in general, and also Sec.
310.3(a)(1)(vii) in particular, must be provided to the customer before
the customer provides express informed consent--which, in the case of
preacquired account telemarketing and a ``free-to-pay conversion''
feature, means before the customer provides account information and
express agreement to be charged for the goods or services on the
account provided. It must also be clear that the customer agrees that
the charge be placed on the account whose digits the customer provided.
The Commission expects that, to comply with this requirement, the
seller or telemarketer shall expressly identify the account to be
charged, and inform the customer that it possesses the customer's
account number already, or has the ability to charge that account
without obtaining the full account number from the customer.
---------------------------------------------------------------------------
\473\ NAAG recommended prohibiting the use of preacquired
account information, even if that information was previously
obtained by the same seller or telemarketer from the consumer, in
solicitations involving a ``free-to-pay conversion'' feature. NAAG-
NPRM at 39. The Commission declines to adopt this recommendation at
this time, and is confident that the solution adopted will provide
consumers the information and command over these transactions they
need to protect themselves from unauthorized charges.
\474\ See note 449 above. Moreover, industry's argument that
there is no evidence of problems where there is a transfer of
account information ``after consent'' is belied by the record of law
enforcement actions in this area. See, e.g., FTC v. Smolev, No. 01-
8922 CIV ZLOCH (S.D. Fla. 2001). In fact, in virtually all of the
state and federal law enforcement actions in this area, consumers
stated that they did not recognize the billing entity or understand
how that seller obtained their account information. See notes 450-51
above.
---------------------------------------------------------------------------
Finally, the Commission is requiring that the entire sales
transaction be recorded. The record evidence shows that it is not
adequate in offers involving both preacquired account information and
``free-to-pay conversions'' to record a portion of the call that
allegedly includes some or all of the required disclosures regarding
cost and payment.\475\ Often, what law enforcement efforts have gleaned
is that the necessary disclosures are grouped together during the
``verification'' process, at the end of a lengthy telemarketing pitch
during which consumers are led to reasonably believe that they are not
committing to a purchase. As one commenter explained:
---------------------------------------------------------------------------
\475\ NAAG-NPRM at 32-33 (discussing ineffectiveness of
verification).
[C]onsumers are led to believe that they are agreeing to accept
materials in the mail, preview a program along with a free gift, or
the like. As one telemarketer explicitly stated in its scripts:
`we're sending you the information through the mail, so you don't
have to make a decision over the phone.' Only at the tail end of a
lengthy call does the telemarketer obliquely disclose that the
consumer's preacquired account will be charged. By this time, many
consumers have already concluded that they understood the deal to
require their consent only after they review the mailed materials. .
. . Preacquired account telemarketing verification taping typically
is preceded by statements suggesting that the taping is 'to prevent
clerical error' and critical information is revealed in ways that
many consumers will not grasp at the end of a conversation.\476\
---------------------------------------------------------------------------
\476\ Id.
Thus, not only the material terms provided the consumer, but also
the context and manner in which the offer is presented are vital to
determining that the consumer's consent is both express and informed.
Moreover, consumers' confusion about the nature of ``free-to-pay
conversion'' offers--particularly in the context of preacquired account
telemarketing--is evidenced by the steady stream of complaints, as well
as evidence uncovered in law enforcement actions by the states.\477\
Further, the record contains compelling evidence of cancellation
patterns for membership programs offered on a ``free-to-pay
conversion'' basis in preacquired account telemarketing transactions.
As explained by the Minnesota Attorney General,
---------------------------------------------------------------------------
\477\ See Illinois-NPRM at 2 (In Illinois' lawsuit against Blitz
Media, Inc., the attorney general initially received 146 consumer
complaints. After initiating the litigation, the Illinois attorney
general found that approximately 45,000 Illinois consumers had been
enrolled in Blitz Media's buyers club, but only about 8,000 of them
remain ``active'' members of the buyers club, since the rest had
discovered these charges and cancelled the membership, or initiated
a chargeback, claiming the charge was unauthorized.).
[c]onsumers canceling within the 30-day free trial period likely
indicate that [they] understood (either during the phone call or
with the follow-up material or both) the terms of the deal. If all
consumers understood the free trial offer, one would expect to see a
significant cancellation rate within the 30 day free trial offer
period followed by a scattered pattern of later cancellations. The
data we have reviewed [from two financial institutions of
cancellation dates relative to date of enrollment for Minnesota
consumers charged by the institutions as a result of preacquired
account telemarketing transactions involving a ``free-to-pay
conversion''] suggest this is not the typical pattern. . . . The
overall pattern of [the data from each institution] is strikingly
similar. The largest concentration of cancellations occurs
immediately after the free trial period but coincident with the
first account charge for the service. The cancellation rate in the
free trial period is less than half the cancellation rate in the 31-
90 day period, when consumers have been billed for the service. This
result is consistent with the pattern of consumer complaints
alleging unauthorized charges received by Attorneys General and with
the data suggesting that most consumers cancel these charges because
they believe they are unauthorized.\478\
---------------------------------------------------------------------------
\478\ Minnesota-Supp. at 4-5. One industry commenter submitted
the results of a telephone survey, which it asserted showed that
consumers do, in fact, understand the terms of these ``free-to-pay
conversion'' features. See note 469 above. The data received in
litigation from the institutions participating in these
telemarketing campaigns, however, belies the purported conclusions
of this survey. See note 457 above.
Consequently, to ensure that the consent provided by the consumer is
not only ``express'' but is also ``informed'' in this limited, but
problematic, context of ``free-to-pay conversion'' features in
preacquired account telemarketing offers, the amended Rule requires
that an audio recording of the entire transaction, from start to
finish, be created and maintained. A handful of commenters argued that
such audio recording would be prohibitively expensive, particularly in
the inbound context, where some sellers and telemarketers have not
traditionally recorded the telemarketing calls.\479\ Given the narrow
category of calls to which this requirement applies, and the rapidly
growing use of inexpensive and efficient digital audio recording
technology,\480\ the Commission believes that this requirement will not
pose a significant burden to sellers and telemarketers who freely
choose to market their goods or services using a ``free-to-pay
conversion'' feature and preacquired account information. Moreover, the
record is compelling that any incremental costs to industry of these
requirements are likely outweighed by the benefit to consumers of
curtailing the practice as it is currently employed in the marketplace.
---------------------------------------------------------------------------
\479\ ERA/PMA-Supp. at 3, 7 (``We understand from certain of our
members that imposing the record keeping requirement[s] on inbound
[upsells] may require substantial investments of money and resources
to develop the systems necessary to comply with these
requirements.'').
\480\ See generally Contract Digital Recorder, by Data-Tel Info
Solutions, at http://www.datatel-info.com/digicorder.html
(describing affordable digital recording system for telemarketing
operations); Veritape Call Centre-Case Study 2, at http://www.veritape.com/veritape/vtcccase.htm
(describing a US call center
that saved $70,000 annually by switching from analog taping process
to digital recording); Ron Elwell, Streamlining Call Center
Operations, Teleprofessional, Sept. 1998, at 130-34 (discussing
``how CTI-enabled digital recording technology is helping call
centers of all types be more productive and profitable'');
Teleprofessional, Inc., CCPN's System Owner Shootout, CALL CENTER
PRODUCT NEWS, Fall 1998, at 52-54, 56 (explanations by several
telemarketers' systems professionals of savings and efficiencies
experienced using improved digital recording and monitoring
systems); Michael Binder, The Evolution of Digital Recording in the
Call Center, TELEMARKETING & CALL CENTER SOLUTIONS, Nov. 1997, at
38. Cf. Duncan Furness, Choosing a Tape Technology, COMPUTER
TECHNOLOGY REVIEW, Nov. 2000, at 40.
---------------------------------------------------------------------------
In addition to the requirements noted above, in any telemarketing
transaction involving preacquired account information (but not a
``free-to-pay conversion'' feature), Sec. 310.4(a)(6)(ii) specifically
requires that the seller or telemarketer (1) at a minimum, identify the
account to be charged with
[[Page 4623]]
sufficient specificity for the customer or donor to understand what
account will be charged, and (2) obtain from the customer or donor his
or her express agreement to be charged for the goods or services and to
be charged using the account number identified during the transaction.
Again, the Commission intends this to mean that the telemarketer
expressly inform the customer that the seller or telemarketer already
has the number of the customer's specifically identified account or has
the ability to charge that account without getting the account number
from the customer.
The Commission has taken a targeted approach in the amended Rule,
focusing on the tangible harm caused by the practices identified as
problematic in the rulemaking proceeding. It bears noting, however,
that the Commission recognizes preacquired account telemarketing as an
emerging practice, one that will receive close attention from the
Commission, and, no doubt, the state Attorneys General. The Commission
wishes to emphasize that, particularly in transactions involving
``free-to-pay conversion'' offers, so long as preacquired account
information is involved, there exists that fundamental shift in the
bargaining relationship discussed above, and therefore potential for
abuse.\481\ While the Commission is confident that the majority of
industry members will abide by the new provisions, and that doing so
will provide consumers the information and control needed to shield
them from the abuses encountered in the past with these transactions,
it also notes that the best practice in such circumstances is to ensure
that the seller or telemarketer does not have the ability to cause a
charge to a consumer's account without getting the account number from
the consumer herself. This practice would, in effect, be self-
enforcing, as the control over the transaction (absent
misrepresentations by the telemarketer) would truly be with the
consumer, where it belongs. Should it become apparent that the remedies
imposed by the amended Rule are insufficient, or that preacquired
account telemarketing practices have evolved further in such a way as
to cause additional harm to consumers, the Commission will not hesitate
to revisit its approach to the practice and revise the Rule
accordingly.
---------------------------------------------------------------------------
\481\ NAAG-NPRM at 30; Covington-Supp. at 4-5.
---------------------------------------------------------------------------
Other Recommendations
Other than those commenters who suggested deleting the prohibition
entirely,\482\ industry commenters' primary recommendation was to
substitute the express verifiable authorization provision of Sec.
310.3(a)(3), or some variation on a disclosure and ``consent''
requirement,\483\ for the proposed blanket prohibition on the transfer
of billing information.\484\ The general theme was that disclosures and
``consent'' were sufficient to remedy the harm being caused consumers
by the misuse of preacquired account information. It is unclear what
these commenters mean by ``consent'' in this context, as they also
recommended that sellers and telemarketers be permitted to use any of
the three existing avenues for achieving express verifiable
authorization, including providing consumers a written confirmation
after terminating the telephone call. In the context of ``free-to-pay
conversions,'' the record shows, in no uncertain terms, that
disclosures are not sufficient to prevent widespread consumer
injury.\485\ Most sellers and telemarketers have been telling consumers
at some point in the conversation, in greater or lesser detail, that
they will be charged at some point for the goods or services being
offered on a ``free-to-pay conversion'' basis; but, as noted above,
these disclosures come late in the conversation, and do not resonate
with consumers who understand ``free'' to mean ``free'' and that to
obligate oneself to purchase something, the buyer must provide a
payment mechanism to the seller.\486\ Often, these disclosures come in
writing in a ``membership package'' sent to the consumer some time
after the call. Law enforcement experience has shown that these
disclosures are meaningless to consumers--who either never receive the
packets, or assume they are junk mail and discard them.\487\ Moreover,
in any telemarketing transaction, but most especially in preacquired
account telemarketing, it is imperative that the seller or telemarketer
ensure that the consumer actively, and unequivocally, provides his or
her consent to be charged, and to be charged using a particular payment
mechanism. The Commission has determined, therefore, that prohibiting
unauthorized charges, and laying out what is required to obtain express
informed consent in certain circumstances, is the most appropriate
solution not only to the harm caused by preacquired account
telemarketing abuses, but also by other exploitative billing methods in
telemarketing.
---------------------------------------------------------------------------
\482\ ABA-NPRM at 8-9; ABIA-NPRM at 4; CMC-NPRM at 9-10; MBNA-
NPRM at 6.
\483\ See, e.g., DMA-NPRM at 39-40 (specific to upselling) (the
Commission ``should instead require that notice of transfer of
billing information be disclosed to the consumer and that consent be
given by the consumer prior to the transfer'').
\484\ See ATA-NPRM at 20; ATA-Supp. at 5-6; CCC-NPRM at 11-12;
ERA-NPRM at 24-25; ERA/PMA-Supp. at 11-15; ITC-NPRM at 5; MPA-NPRM
at 26-29; MPA-Supp. at 5-6; NATN-NPRM at 3 (Supporting ERA
Guidelines and recommendation); Noble-NPRM at 3 (same); NSDI-NPRM at
3 (same); PMA-NPRM at 19 (same). See also Associations-Supp. at 6.
\485\ Review of taped verifications obtained as evidence in the
Commission's law enforcement actions and in similar state actions
convincingly demonstrates the inadequacy of disclosures in this
context.
\486\ See NCL-NPRM at 7 (``Merely requiring telemarketers to
disclose that they have already obtained the billing account
information from another source or that they may share that
information with other marketers would not provide consumers with
adequate protection from abuse. Express verifiable authorization to
use the billing account information is not enough in these instances
because it comes into play after the fact; it does not give
consumers prior knowledge of or control over who has their account
information.'').
\487\ See discussion of Sec. 310.3(a)(3)(iii) above.
---------------------------------------------------------------------------
Sec. 310.4(a)(7) -- Failing to transmit caller identification
information
Section 310.4(a)(7) of the amended Rule addresses transmission of
caller identification (``Caller ID'') information. This section
prohibits any seller or telemarketer from ``failing to transmit or
cause to be transmitted the telephone number, and, when made available
by the telemarketer's carrier, the name of the telemarketer, to any
caller identification service in use by a recipient of a telemarketing
call.'' A proviso to this section states that it is not a violation to
substitute the actual name of the seller or charitable organization on
whose behalf the call is placed for the telemarketer's name, or to
substitute the seller's customer service number or the charitable
organization's donor service number that is answered during regular
business hours for the number the telemarketer is calling from or the
number billed for making the call. Full compliance with the Caller ID
provision will be required by January 29, 2004.
The record includes several key principles supporting the
Commission's decision to adopt this approach to Caller ID information.
First, transmission of Caller ID information is not a technical
impossibility, as some commenters had argued or implied. Second,
telemarketers are able to transmit this information at no extra cost,
or minimal cost. Third, consumers will receive substantial privacy
protection as a result of this provision.\488\ Fourth, consumers and
telemarketers will both benefit from the increased accountability in
telemarketing that will result from this
[[Page 4624]]
provision.\489\ Fifth, law enforcement groups will benefit from a vital
new resource from the required transmission of Caller ID information in
telemarketing.\490\
---------------------------------------------------------------------------
\488\ EPIC-NPRM at 11-12.
\489\ Make-A-Wish-NPRM at 6; Associations-Supp. at 7;
DialAmerica-Supp. at 2.
\490\ Make-A-Wish-NPRM at 6; McClure-NPRM at 2; NACAA-NPRM at 9;
NYSCPB-NPRM at 4; Patrick-NPRM at 2-3; TRA-NPRM at 11.
---------------------------------------------------------------------------
Background. The original Rule did not address the issue of Caller
ID, or the feasibility or desirability of requiring telemarketers to
transmit Caller ID information. During the Rule Review, however, the
Commission received numerous comments from consumers and others
expressing frustration about telemarketers' routine failure to transmit
Caller ID information.\491\ Commenters complained that when
telemarketers called, consumers' Caller ID devices would show a phrase
like ``unknown,'' ``out of area,'' or ``unavailable,'' instead of
displaying the name and telephone number of the telemarketer or seller
on whose behalf the call was made.\492\ Based on the Rule Review
record, the Commission proposed in the NPRM to prohibit blocking,
circumventing, or altering the transmission of Caller ID
information.\493\
---------------------------------------------------------------------------
\491\ See, e.g., Baressi-RR at 1; Bell Atlantic-RR at 8; Blake-
RR at 1; Collison-RR at 1; Lee-RR at 1; LeQuang-RR at 1; Mack-RR at
1; Sanford-RR at 1.
\492\ See, e.g., Baressi-RR at 1; Blake-RR at 1; Collison-RR at
1; Lee-RR at 1; LeQuang-RR at 1; Mack-RR at 1; Sanford-RR at 1.
\493\ The Caller ID provision is found at Sec. 310.4(a)(7) of
the proposed Rule; discussion of the proposed Rule provision is
found at 67 FR at 4514-16.
---------------------------------------------------------------------------
In support of this proposal, the Commission discussed in the NPRM
the benefits that accrue to consumers from transmission of Caller ID
information and the technical considerations implicated by transmission
of this information.\494\ Consumers benefit because Caller ID
information allows them to screen out unwanted callers and identify
companies that have contacted them so that they can place ``do not
call'' requests to those companies. These features of Caller ID enable
consumers to protect their privacy and are clearly within the ambit of
the Telemarketing Act's mandate, set forth in 15 U.S.C. Sec.
6302(a)(3)(A), to prohibit telemarketers from undertaking a pattern of
unsolicited telephone calls which a reasonable consumer would consider
coercive or abusive of their right to privacy.\495\ The fact that
consumers greatly value the privacy protection provided by receipt of
Caller ID information is evidenced by the fact that, as of the year
2000, nearly half of all Americans subscribed to a Caller ID
service.\496\
---------------------------------------------------------------------------
\494\ 67 FR at 4514-16. The Commission also asked whether trends
in telecommunications might one day permit the transmission of full
Caller ID information when the caller uses a trunk line or PBX
system. Id. at 4538.
\495\ 67 FR at 4514. DMA argued that the Commission lacks
authority to require Caller ID transmission. DMA-NPRM at 48-49.
However, the NPRM clearly explains that the harm to consumers that
arises from failure to transmit Caller ID information falls within
the areas of abuse that the Telemarketing Act explicitly aimed to
address. 67 FR at 4514-16. The Commission therefore rejects DMA's
``lack of authority'' argument.
\496\ Dina ElBoghdady, Ears Wide Shut: Researchers Get Punished
for Telemarketers' Crimes, WASH. POST, Sept. 8, 2002, at H 2.
---------------------------------------------------------------------------
The Commission noted in the NPRM the conflict in opinion during the
Rule Review regarding the feasibility of requiring Caller ID
transmission by telemarketers.\497\ Based on its assessment of the
information on the record at the close of the Rule Review, the
Commission expressed its uncertainty that telemarketers using ``T-1''
trunk lines could transmit Caller ID information, and the Commission
therefore did not at that time propose to mandate such
transmission.\498\ The NPRM also acknowledged telemarketers' argument
that, even if they could transmit Caller ID information, they would
still face the challenge of transmitting a number that would be useful
to consumers.\499\
---------------------------------------------------------------------------
\497\ 67 FR at 4515.
\498\ Id.
\499\ Id. Some telemarketers asserted that the telephone number
that would likely be displayed on consumers' Caller ID services
would be the telemarketer's central switchboard or trunk exchange,
rather than a customer service number or a number where consumers
could submit a ``do not call'' request.
---------------------------------------------------------------------------
The Commission received numerous comments in response to the NPRM's
discussion of Caller ID. Some industry representatives simply posited
that transmission of Caller ID information was not possible, or argued
that it was possible to transmit a telephone number, but that it was
impossible or prohibitively expensive to transmit a telephone number
that consumers could use to call the telemarketer that had called
them.\500\ Consumer groups and law enforcement representatives urged
the Commission not to accept telemarketers' claims that mandatory
Caller ID transmission is impossible or prohibitively expensive without
carefully examining the technical considerations involved.\501\ A
number of consumers expressed frustration with telemarketers who fail
to transmit Caller ID information.\502\
---------------------------------------------------------------------------
\500\ ANA-NPRM at 6; Associations-NPRM at 3; DMA-NPRM at 49;
NAA-NPRM at 17; Nextel-NPRM at 25; Synergy Solutions-NPRM at 3-4;
Teledirect-NPRM at 3; Associations-Supp. at 7. See also AFSA-NPRM at
19; Assurant-NPRM at 6. But see EPIC-NPRM at 11, 13; NAAG-NPRM at
45.
\501\ EPIC-NPRM at 11-12; NAAG-NPRM at 45; AARP-NPRM at 5-6.
\502\ See, e.g., Robert Hawrylak (Msg. 3382); Carl Wallander
(Msg. 861); George Kapnas (Msg. 2243); Tom Kaufmann (Msg. 2433); Bob
Schmitt (Msg. 3494); Bradley Davis (Msg. 3890); Toryface (Msg.
19744). In all, more than 200 consumers stated that the Commission's
proposed approach in the NPRM was not adequate to protect consumers'
right to privacy.
---------------------------------------------------------------------------
Industry commenters generally supported the proposed prohibition on
blocking Caller ID, but urged the Commission not to require Caller ID
transmission,\503\ although one telemarketer very strongly advocated
that the Commission do so in order to remove the cloak of anonymity
from telemarketers and thus promote accountability for the greater
benefit of the industry as a whole.\504\ A number of industry
commenters wanted to make sure that ``the prohibited practice is the
deliberate manipulation of the Caller-ID signal'' and that ``[a]s long
as no overt actions are taken to disrupt the information, there is no
violation.''\505\ Several commenters expressly urged that purchasing or
using telephone equipment that lacks Caller ID functionality should not
be a violation of the Rule.\506\
---------------------------------------------------------------------------
\503\ ABA-NPRM at 9; ARDA-NPRM at 6; ANA-NPRM at 6;
Associations-NPRM at 3; BofA-NPRM at 7; CBA-NPRM at 10; Comcast-NPRM
at 4; DMA-NPRM at 48; ERA-NPRM at 48-49; Green Mountain-NPRM at 27;
ITC-NPRM at 3; Lenox-NPRM at 6; MPA-NPRM at 49; NAA-NPRM at 17;
Nextel-NPRM at 24-25; Synergy Solutions-NPRM at 3-4; Tribune-NPRM at
10; VISA-NPRM at 13. In the NPRM, the Commission specifically asked,
among other things, whether it would ``be desirable to propose a
date in the future by which all telemarketers would be required to
transmit Caller ID information.'' 67 FR at 4538.
\504\ DialAmerica-NPRM at 24; DialAmerica-Supp. at 10; June 2002
Tr. II at 83 (DialAmerica).
\505\ Synergy Solutions-NPRM at 3. See also Nextel-NPRM at 25;
Noble-NPRM at 4; NATN-NPRM at 4; NSDI-NPRM at 4; ITC-NPRM at 3.
\506\ AFSA-NPRM at 19; Comcast-NPRM at 4; CBA-NPRM at 10; Cox-
NPRM at 37; Household Bank-NPRM at 16; Nextel-NPRM at 25; Thayer-
NPRM at 5; Wells Fargo-NPRM at 3. But see EPIC-NPRM at 11, 13-14;
McClure-NPRM at 1; Patrick-NPRM at 2-3; Thayer-NPRM at 5 (Commenter
raises issue of whether Internet telephony users could transmit
Caller ID information. There is nothing in the record indicating
that telemarketers use Internet telephony. If they do use such
technology, they are reminded that all telemarketers subject to the
Rule must transmit Caller ID information. The FTC's own telephone
system uses IP telephones, which do provide Caller ID information.).
---------------------------------------------------------------------------
Technical feasibility of mandatory transmission of Caller ID
information. The rulemaking record as a whole shows that telemarketers'
failure to transmit Caller ID information need not be the result of
their blocking its transmission or some other affirmative measure on
their part.\507\ Rather, the record indicates that non-transmission
[[Page 4625]]
of Caller ID information may be a by-product of purchasing or using
telephone equipment that lacks Caller ID transmission
functionality.\508\
---------------------------------------------------------------------------
\507\ ATA-Supp. at 16-17; Chicago ADM-NPRM at 1; Lenox-NPRM at
6; NRF-NPRM at 19.
\508\ EPIC-NPRM at 11; TRA-NPRM at 11. As is discussed below,
non-transmission may also result from errors in telephone companies'
equipment.
---------------------------------------------------------------------------
In concluding that required transmission of Caller ID information
is technically feasible and not costly for telemarketers, the
Commission was persuaded in part by the example provided by
DialAmerica. In its written comments and at the June 2002 Forum,
DialAmerica explained how it transmits Caller ID information to the
consumers it calls.\509\ DialAmerica's carrier assigns a telephone
number to each of DialAmerica's call centers. When a sales
representative from a particular call center calls a consumer, that
call center's assigned telephone number is transmitted to the
consumer's Caller ID service. SBC, a large provider of common carriage
services, provided support for the availability of DialAmerica's
model.\510\ DialAmerica stated at the June 2002 Forum that it does not
pay its carrier any extra amount to transmit this assigned telephone
number to consumers.\511\
---------------------------------------------------------------------------
\509\ DialAmerica-Supp., Att. A at 1-2. See also June 2002 Tr.
II at 81-83. According to one of DialAmerica's written comments:
``Caller ID information can be delivered over T-1's today. We have
been doing it for over two years. If the Commission does not mandate
the delivery of Caller ID information, those who would want the
Commission to believe that it cannot be done will have been
successful.'' DialAmerica-Supp. at 10. See also DialAmerica-NPRM at
25 (``The conclusion stated in the NPRM . . . that trunk or T-1
lines will only display a term like ``unavailable'' is not
correct.'') and NAAG-NPRM at 45 (``We have been advised that all
trunk lines . . . should be capable of supporting Caller ID.'')
\510\ See SBC-Supp. at 8-10; June 2002 Tr. II at 80-83. See also
Cox-NPRM at 37; DMA-NPRM at 49; Green Mountain-NPRM at 28;
Associations-Supp. at 7.
\511\ June 2002 Tr. II at 83 (DialAmerica). Moreover, other
moderate-sized telemarketers reported that they currently transmit
Caller ID information. Because they are not compelled to do this,
the Commission believes that doing so is not cost-prohibitive. See
Aegis-NPRM at 5; Lenox-NPRM at 6. See also ANA-NPRM at 6; ARDA-NPRM
at 6. But see ATA-Supp. at 18.
---------------------------------------------------------------------------
The Commission believes the argument by telemarketers that required
transmission of Caller ID information would be impossible or
prohibitively expensive is based substantially on an erroneous
supposition that telemarketers would be required to transmit the
specific telephone number from which a sales representative placed a
given call. The Commission's citation to DialAmerica's approach should
make it clear that the Commission is not requiring this level of
specificity. Under the amended Rule's Caller ID provision,
telemarketers may transmit any number associated with the telemarketer
that allows the called consumer to identify the caller. This includes a
number assigned to the telemarketer by its carrier, the specific number
from which a sales representative placed a call, or a number used by
the telemarketer's carrier to bill the telemarketer for a given call.
In the alternative, a telemarketer may transmit the seller's customer
service number or the charitable organization's donor service number,
provided that this number is answered during regular business hours.
Not every telemarketer will need to follow DialAmerica's approach
for transmission of Caller ID information. The record reflects various
options in calling equipment used by telemarketers.\512\ A
telemarketer's choice of calling equipment is determined in part by the
telemarketer's size. The smallest telemarketers, most likely placing
calls from home, may contact consumers using a ``plain old telephone
service'' (``POTS'') line. A telemarketer calling consumers with a POTS
line will have no difficulty transmitting Caller ID information.\513\
This is also true if, to call consumers, the telemarketer uses
Integrated Services Digital Network-Basic Rate Interface (``ISDN-BRI'')
technology, which, like POTS lines, is likely to be utilized only by
the smallest telemarketers.\514\
---------------------------------------------------------------------------
\512\ See, e.g., Nextel-NPRM at 25 (proprietary dialers);
DialAmerica-Supp., Att. A at 1 (regular trunk groups provisioned by
carrier); Fiber Clean-NPRM at 1 (telemarketers working from home).
\513\ SBC-Supp. at 8.
\514\ http://www.bell-labs.com/technology/access/ISDN-BRI.html.
ISDN-BRI essentially uses a caller's existing wiring to transmit
calls digitally. As such, its capability to transmit Caller ID
information is akin to a POTS line's capability.
---------------------------------------------------------------------------
Larger telemarketers commonly use a ``private branch exchange''
switch (``PBX''), which enables them to place large volumes of calls
more efficiently.\515\ For telemarketers using a PBX, the primary
determinant in transmitting Caller ID information is the telemarketer's
connection to its telephone company. A telemarketer using a PBX
connects to its telephone company through a ``trunk.''\516\ The more
modern type of trunk used in telemarketing is an ``Integrated Services
Digital Network-Primary Rate Interface'' (``ISDN-PRI'') trunk.\517\ It
is clear from the record that a telemarketer using such an ``ISDN-PRI''
trunk has no difficulty in transmitting Caller ID information to a
consumer.\518\
---------------------------------------------------------------------------
\515\ SBC-Supp. at 8-9. This is also true of telemarketers using
predictive dialers. Predictive dialers used by many telemarketers
contain features similar to a PBX, and the capacity of such a
predictive dialer to transmit Caller ID information is essentially
the same as the capacity of a PBX to do so. See, e.g., Sytel-NPRM at
8 (arguing that telemarketers using predictive dialers should
transmit Caller ID information. This comment suggests that
predictive dialers are capable of transmitting Caller ID
information). See also http://www.pbxinfo.com/portal/modules.php?op=modload&name=Sections&file-=index&req=viewarticle&artid=8
.
\516\ SBC-Supp. at 8-9. An alternative to PBX available to
telemarketers (but not widely used) is called ``Centrex.''
Telemarketers using Centrex connect to their telephone company using
a telephone line; telemarketers using a PBX connect to their
telephone company using a trunk. Because Centrex users use a line
rather than a trunk, telemarketers using Centrex (like telemarketers
using a POTS line or ISDN-BRI) should not find it difficult to
transmit Caller ID information. See http://www.granitestatetelephone.com/sfb_centrex.html
.
\517\ June 2002 Tr. II at 76-77 (SBC).
\518\ EPIC-NPRM at 12; SBC-Supp. at 8-9; June 2002 Tr. II at 80-
81 (SBC).
---------------------------------------------------------------------------
The older kind of trunk used in telemarketing is a ``T-1''
trunk.\519\ Telemarketers using a ``T-1'' trunk are perhaps most likely
to follow DialAmerica's model by having their carriers assign a
telephone number to the trunk for transmission to consumers' Caller ID
services. This is true because, in contrast to ``ISDN-PRI'' trunks,
``T-1'' trunks do not routinely transmit the caller's telephone number
to Caller ID devices.\520\ Some telemarketers stated that it may be
technically feasible (but costly) for them to upgrade, reconfigure, or
replace their PBX switches or their ``T-1'' trunks in order to transmit
a specific sales representative's telephone number.\521\ However, the
Commission's approach does not require this level of precision.
Consequently, telemarketers will not have to absorb the expense
associated with achievement of this level of precision.
---------------------------------------------------------------------------
\519\ Some telemarketers may use a ``T3'' or ``DS3'' trunk. This
kind of trunk is essentially a collection of ``T-1'' trunks; as
such, it operates in a manner similar to a T-1 for purposes of
Caller ID functionality. See http://www.hal-pc.org/[tilde]ascend/
MaxTNT/hwinst/tntt3.htm.
\520\ SBC-Supp. at 8-9.
\521\ Synergy Solutions-NPRM at 4; TeleDirect-NPRM at 3. But see
EPIC-NPRM at 11-12.
---------------------------------------------------------------------------
Regardless of telemarketers' calling systems and carriers' ability
to assign a telephone number to a telemarketer's call center, there are
occasions in which Caller ID information does not reach the called
consumer even when telemarketers arrange for the transmission of that
information.\522\ Two situations would seem to be outside the control
of the telemarketer. First, the route traveled by a call could pass
through a switch that lacks Caller ID functionality, essentially
dropping
[[Page 4626]]
the Caller ID data but forwarding the rest of the call
transmission.\523\ Second, a malfunction within a carrier's system
could result in the failure to transmit Caller ID information in a
given call.\524\ Because these phenomena are outside the control of the
telemarketer, the telemarketer would not be held liable for violating
this provision of the Rule when the failure to transmit Caller ID
information results from such an occurrence. However, to avoid
liability in such a case, a telemarketer must be able to establish that
it has taken all available steps to ``transmit or cause the
transmission of'' identifying information. This includes employing
technical means within the telemarketer's operation, ensuring that the
telemarketer's telephone company is equipped to transmit Caller ID
information, and not using any means to block Caller ID transmission.
---------------------------------------------------------------------------
\522\ See, e.g., ABA-NPRM at 9; Chicago ADM-NPRM at 1; IMC-NPRM
at 9; Lenox-NPRM at 6; Teledirect-NPRM at 3; Associations-Supp. at
7; ATA-Supp. at 17.
\523\ ATA-Supp. at 16; SBC-Supp. at 13.
\524\ SBC-Supp. at 13.
---------------------------------------------------------------------------
A very small number of telemarketers may be located in areas of the
country that are served only by telephone companies that are not
capable of transmitting Caller ID information or assigning a telephone
number to the telemarketer that can be transmitted to a called
consumer.\525\ The Commission does not intend to require such
telemarketers to relocate to areas of the country that are served by
telephone companies that do provide Caller ID capability. Nonetheless,
in enforcing this provision, the Commission would take into account any
telemarketer's relocation from an area where it can transmit Caller ID
information to a location where it cannot. However, the Commission
believes it is unlikely that a telemarketer would go to such lengths in
order to avoid compliance with this new requirement.
---------------------------------------------------------------------------
\525\ The record reflects that with the exception of some small
interexchange carriers (``IXCs''), competitive local exchange
carriers (``CLECs''), and some incumbent local exchange carriers
(``ILECs'') serving rural pockets of the country, all telephone
companies can pass along Caller ID information. See June 2002 Tr. II
at 78-79; FCC First Report and Order in the Matter of Access Charge
Reform, CC Docket No. 96-262 (May 7, 1997), para. 137; http://www.ss7.net:
Carriers connected to the Signaling System 7 (``SS7'')
network can transmit Caller ID information. SS7 is the predominant
signaling system, and its use is increasing. But see Green Mountain-
NPRM at 28.
---------------------------------------------------------------------------
The Commission recognizes that transmission of Caller ID
information does not depend on technical capability alone.
Telemarketers who currently possess Caller ID capability may
deliberately decline to transmit this information to the consumers they
solicit. There is record evidence to support legitimate explanations
for deliberate blocking of Caller ID transmission.\526\ Fiber Clean,
for example, uses telemarketers working from home; it advocates Caller
ID blocking to protect its employees' privacy.\527\ Other telemarketers
may block Caller ID transmission because they are unable to transmit a
telephone number which would be useful to consumers.\528\
---------------------------------------------------------------------------
\526\ Fiber Clean-NPRM at 1; Cox-NPRM at 37-38; NRF-NPRM at 19.
But see ERA-NPRM at 48; Teledirect-NPRM at 3; ATA-Supp. at 16.
\527\ Fiber Clean-NPRM at 1.
\528\ Cox-NPRM at 37-38; NRF-NPRM at 19.
---------------------------------------------------------------------------
The Commission has concluded that some flexibility regarding what
telephone number and name the telemarketer may transmit best
accommodates the current state of telemarketing.\529\ A telemarketing
service bureau calling on behalf of more than one seller, for example,
may benefit from the option of transmitting the seller's name and
telephone number rather than its own.\530\ Under Sec. 310.4(a)(7),
telemarketers have the option of transmitting a telephone number
associated with them that enables the consumer to identify who called,
or, in the alternative, the seller's customer service number or the
charitable organization's donor service number. If the telemarketer
transmits its own number, that number ideally should enable the
consumer to communicate with the caller to assert a company-specific
``do not call'' request. Alternatively, telemarketers can forward
consumers' return calls to a customer service line.\531\ At-home
callers with a POTS line cannot alter, but they can acquire a second
line for business calls, which would allay privacy concerns associated
with transmission of the caller's residential number.
---------------------------------------------------------------------------
\529\ ARDA-NPRM at 6; Assurant-NPRM at 6; ATA-Supp. at 16; DMA-
NPRM at 50; ERA-NPRM at 49; IMC-NPRM at 8; MPA-NPRM at 9, 49-50. See
also Assurant-NPRM at 6 (Commenter asked that the Rule do more to
prevent transmission of misleading Caller ID information. The
Commission believes that the amended Rule addresses this concern.).
But see AARP-NPRM at 6; NCL-NPRM at 8; Patrick-NPRM at 10
(telemarketer should be required to transmit the seller's name
whenever possible). See also EPIC-NPRM at 12; Make-A-Wish-NPRM at 5-
6; Worsham-NPRM at 4 (telemarketer should identify itself rather
than the seller). See also BellSouth-NPRM at 4-5 (no flexibility in
transmitted number should be permitted).
\530\ MPA-NPRM at 9; DMA-NPRM at 50. See also Green Mountain at
28; ATA-Supp. at 16.
\531\ DialAmerica provides a model for the use of call
forwarding in this context. See DialAmerica-Supp., Att. A at 2.
---------------------------------------------------------------------------
Consumers benefit from transmission of Caller ID information. The
record, taken as a whole, establishes that it is neither technically
nor economically infeasible for telemarketers to transmit Caller ID
information. On the other side of the equation, consumers derive
substantial benefit from receiving Caller ID information. Moreover, as
the Commission explained in the NPRM, the transmission of Caller ID
information is necessary to protect consumers' privacy under the
Telemarketing Act.\532\ Consumers in large numbers subscribe to, and
pay for, Caller ID services offered by their telephone companies.\533\
Many of these consumers subscribe to Caller ID specifically to identify
incoming calls from telemarketers and screen out unwanted telemarketing
calls.\534\ Indeed, according to Private Citizen, consumers spend an
aggregate of $1.4 billion annually on Caller ID services to limit
unwanted telemarketing calls.\535\ Consumers who commented on the
record expressed frustration at the failure of telemarketers to provide
Caller ID information.\536\ These consumers have, over time, come to
the conclusion that an incoming call that fails to provide Caller ID
information is commonly a telemarketing call.\537\ As a result, some
consumers decline to answer these calls.\538\ In an attempt to protect
their privacy from incoming calls with no Caller ID information
provided, other consumers have gone beyond call screening with services
such as Caller Intercept and Privacy Manager, both of which are offered
by telephone companies for a fee, that intercept incoming calls with no
Caller ID information and require such callers to identify themselves
before their call will be connected.\539\ At present, Caller ID
services are an ineffective solution from consumers' perspective: many
[[Page 4627]]
consumers pay added costs simply to find out who is calling them, yet
this investment is useless when the identifying information is not made
available.\540\
---------------------------------------------------------------------------
\532\ 67 FR at 4514.
\533\ Dina ElBoghdady, Ears Wide Shut: Researchers Get Punished
for Telemarketers' Crimes, WASH. POST, Sept. 8, 2002, at H2 (Noting
that, according to a survey conducted in 2000, nearly half of all
Americans subscribe to caller ID); ACUTA-NPRM at 2.
\534\ McClure-NPRM at 3; Private Citizen-NPRM at 2, Susannah Fox
(Msg. 3624), CN Rhodine (Msg. 480), Gautham Achar (Msg. 596), Brenda
Hall (Msg. 825), Carl Wallander (Msg. 861). See also 67 FR at 4515,
n.223 (citing Bell Atlantic survey finding that three out of four
residential customers buy Caller ID to help stop abusive telephone
calls).
\535\ Private Citizen-NPRM at 2. See also Associated Press,
Phone Companies Act as Double Agents in Telemarketing War, CHI.
TRIB., Oct. 27, 2002, at C4.
\536\ See, e.g., Robert Hawrylak (Msg. 3382), Patricia Frank
(Msg. 223), Jo Ann Kilmer (Msg. 530), Jim Kelly (Msg. 541), Carl
Wallander (Msg. 861), John G. Talafous (Msg. 1236), Louis Sarvary
(Msg. 1319), George M. Kapnas (Msg. 2243), Bob Greene (Msg. 2716),
FarmGirl16F3 (Msg. 14015).
\537\ See, e.g., Karen Peters (Msg. 3814), Chuck Jackson (Msg.
209).
\538\ See, e.g., E Pereira (Msg. 214), Brenda Hall (Msg. 825),
Victoria Brigman (Msg. 3889).
\539\ See, e.g., http://www22.verizon.com/ForYourHome/SAS/res_fam_identify.asp
; Private Citizen-NPRM at 2; DC-NPRM at 5; EPIC-
NPRM at 11; McClure-NPRM at 2.
\540\ AARP-NPRM at 5; EPIC-NPRM at 11; McClure-NPRM at 3. But
see Lynn Gaubatz (Msg. 2769) (Consumer prefers current state of
affairs where ``most'' telemarketers block transmission of Caller ID
information because her Caller ID is programmed to refuse calls from
parties who block such transmission. Using this arrangement, the
consumer reports receiving few telemarketing calls.).
---------------------------------------------------------------------------
With the exception of Fiber Clean, which argued in favor of
allowing at-home telemarketers to block Caller ID transmission,
comments from industry members on the whole did not argue that
telemarketers have a reason to block Caller ID transmission which might
override the substantial privacy protection afforded to consumers when
their Caller ID service shows them who is calling.\541\ To the
contrary, comments from industry members supported the privacy
principle behind the Rule's Caller ID provision, but took issue with
the proposition that they should be required to transmit or cause
transmission of Caller ID information.\542\ Therefore, there is strong
support for the Commission's position that requiring Caller ID
transmission in telemarketing calls will help promote consumers'
privacy by allowing them to know who is calling them at home.
---------------------------------------------------------------------------
\541\ Several comments from industry groups asserted that the
Commission should yield to the FCC's standard on Caller ID blocking,
under which the calling party's ability to block Caller ID
transmission is preserved. See, e.g., DMA-NPRM at 48-49; SBC Supp.
at 10-11. As is discussed below, however, the concerns at stake in
the FCC's regulation--law enforcement and safety--are not implicated
by telemarketing calls.
\542\ DMA-NPRM at 48; IMC-NPRM at 8.
---------------------------------------------------------------------------
Transmission of Caller ID information will also promote
accountability throughout the industry--a goal championed by
consumers\543\ and industry members\544\ alike. The Commission is
persuaded by the argument DialAmerica presented in favor of requiring
transmission of Caller ID in telemarketing calls. According to
DialAmerica: ``[d]elivery of Caller ID information, that will be
displayed on a consumer's Caller ID device or that can be accessed
through such services as *69, is essential to create accountability in
the outbound telemarketing industry.''\545\
---------------------------------------------------------------------------
\543\ See, e.g., Teresa Vargas (Msg. 1292) (``I think
telemarketers should NOT be able to block their phone numbers on
Caller ID screens or *69. This will make the telemarketers more
accountable, particularly if their tactics are in violation of a
``do-not-call'' request or if, [sic] the telemarketers successfully
scam consumers.''); Lisa Bellanca (Msg. 2007).
\544\ See, e.g., DialAmerica-Supp. at 2; June 2002 Tr. II at 91-
92 (ERA).
\545\ DialAmerica-Supp. at 2.
---------------------------------------------------------------------------
Commenters noted that the increase in accountability that would
accrue from requiring transmission of Caller ID information in
telemarketing would provide particular benefit in addressing abandoned
calls.\546\ Consumers whose privacy has been abused by dead air and
call abandonment find it difficult, if not impossible, to ascribe those
practices to a particular telemarketer unless Caller ID information is
provided.\547\ As explained by DialAmerica, mandatory transmission of
Caller ID information will provide ``a strong incentive for companies
to keep abandonment rates low and eliminate 'dead air,''' as these
companies do not want to engage in practices that might encourage
consumers to invoke their company-specific ``do-not-call'' rights.\548\
---------------------------------------------------------------------------
\546\ DialAmerica-NPRM at 25; Sytel-NPRM at 8; AARP-NPRM at 9;
ARDA-NPRM at 15.
\547\ http://www.opc-marketing.com/predictive.htm (``[I]t is
assumed that abandoned calls to anonymous consumers do not harm the
call center's business.'').
\548\ DialAmerica-Supp. at 3.
---------------------------------------------------------------------------
The enhanced accountability provided by Caller ID transmission
extends beyond complaints about call abandonment and dead air. Caller
ID information provides a record of identification that endures beyond
the telemarketing call. The prompt disclosures required by 310.4(d)
provide consumers with a needed introduction to a solicitation call,
but do not provide an enduring record of identifying information, as
most consumers do not answer the phone with pen and paper at the ready
to write down the name of the calling party. Moreover, just as industry
comments did not dispute the privacy protections provided by Caller ID
transmission, neither did they present a rebuttal to the argument that
such transmission will promote accountability in telemarketing. Indeed,
the large majority of telemarketers--entities built upon good business
practices and compliance with the Rule--will benefit from a provision
designed to respond to deceptive and abusive practices aided by
anonymity in telemarketing.\549\
---------------------------------------------------------------------------
\549\ See, e.g., AARP-NPRM at 6.
---------------------------------------------------------------------------
By eliminating anonymity in telemarketing, the Caller ID provision
will serve a third, equally important goal: it will provide law
enforcement with a significant new resource.\550\ In the years
following promulgation of the original Rule, the Commission and the
states have created a substantial record of enforcement.\551\ However,
enforcement efforts concerning some Rule provisions have been
frustrated because of difficulty in identifying violators.\552\ Sellers
and telemarketers that have failed to honor ``do-not-call'' requests
have been particularly hard to identify.\553\ A number of comments in
the record noted the need for greater ability to identify possible
violators, and the advantages of Caller ID information in filling that
need.\554\ AARP noted that required transmission of Caller ID
information will also enable consumers to contact government agencies
and the Better Business Bureau to verify the legitimacy of the
telemarketer, which will help to prevent fraud before it occurs.\555\
Therefore, the transmission of Caller ID information likely will aid
law enforcement's ability to enforce the TSR, and increase the Rule's
effectiveness.
---------------------------------------------------------------------------
\550\ TRA-NPRM at 11; EPIC-NPRM at 11-12.
\551\ FTC law enforcement actions alone total over 139 cases,
resulting in total judgments of over $200 million since the Rule's
inception.
\552\ June 2002 Tr. II at 21.
\553\ Donald Munson (Msg. 25516); EPIC-NPRM at 11; NYSCPB-NPRM
Att. A at 4-5.
\554\ DialAmerica-NPRM at 25-26; EPIC-NPRM at 11-12; Patrick-
NPRM at 2-3; TRA-NPRM at 11; CN Rhodine (Msg. 480); Charles Goodwin
(Msg. 2079); Donald Munson (Msg. 25516).
\555\ AARP-NPRM at 6.
---------------------------------------------------------------------------
Consistency with FCC regulations. FCC regulations require carriers
using SS7\556\ to provide a mechanism by which a line subscriber can
block the display of his or her telephone number on a Caller ID
device.\557\ SBC referenced the FCC's approach to Caller ID blocking to
argue that calling parties' interest in privacy ``outweighs the general
usefulness of Caller ID service.''\558\ As the NPRM made clear, the
FCC's requirement that common carriers be able to allow Caller ID
blocking is meant to address specific calling situations in which
protecting the calling party's privacy takes on particular
urgency.\559\ Cited examples include undercover law enforcement
operations and calls placed from battered women's shelters.\560\ No
such privacy justification suggests itself in the case of
telemarketers. Moreover, there is no conflict between the amended
Rule's Caller ID provision and FCC regulations. The FTC's provision
requires sellers and telemarketers to transmit Caller ID information;
it does not create an obligation or a prohibition for common carriers.
FCC regulations require certain carriers to provide a mechanism for
blocking display of Caller ID information; they do not grant
[[Page 4628]]
sellers and telemarketers the right to block transmission of that
information.
---------------------------------------------------------------------------
\556\ See note 526 above for more on SS7 technology.
\557\ 47 CFR 64.1601.
\558\ SBC-Supp. at 10-11.
\559\ 67 FR at 4515, n.228. See also ATA-Supp. at 16; EPIC-NPRM
at 14.
\560\ Id.
---------------------------------------------------------------------------
Sec. 310.4(b) -- Pattern of calls
Section 310.4(b)(1) of the original Rule specifies that ``[i]t is
an abusive telemarketing act or practice and a violation of this Rule
for a telemarketer to engage in, or for a seller to cause a
telemarketer to engage in,'' several practices deemed to be abusive of
consumers. The proposed Rule contained some modifications to various
subsections of this provision. The responses received in response to
the NPRM, and the discussion at the June 2002 Forum, are set forth
below.
Sec. 310.4(b)(1)(i) -- Calling repeatedly or continuously
Section 310.4(b)(1)(i) specifies that it is an abusive
telemarketing act or practice to cause any telephone to ring, or to
engage any person in telephone conversation, repeatedly or
continuously, with intent to annoy, abuse, or harass any person at the
called number. None of the comments recommended that changes be made to
the current wording of Sec. 310.4(b)(1)(i).\561\ Therefore, the
language in that provision remains unchanged in the amended Rule.\562\
However, the expansion in the scope of the Rule effectuated by the USA
PATRIOT Act brings within the ambit of this provision telemarketers
soliciting charitable contributions.
---------------------------------------------------------------------------
\561\ In its comments in the Rule Review, NASAA stated that this
provision strikes directly at one of the manipulative techniques
used in high-pressure sales to coerce consumers to purchase a
product, and noted that the organization advises consumers that one
of the ``warning signs of trouble'' is the ``three-call'' technique
used by fraudulent sellers of securities. NASAA-RR at 2.
\562\ Section 310.4(b)(1)(i) of the amended Rule prohibits as an
abusive practice ``causing any telephone to ring, or engaging any
person in telephone conversation, repeatedly or continuously with
intent to annoy, abuse, or harass any person at the called number.''
---------------------------------------------------------------------------
Sec. 310.4(b)(1)(ii) -- Denying or interfering with ``do-not-call''
rights
In the NPRM, the Commission proposed to prohibit a telemarketer
from denying or interfering in any way with a person's right to be
placed on a ``do-not-call'' list, including hanging up the telephone
when a consumer initiates a request that he or she be placed on the
seller's list of consumers who do not wish to receive calls made by or
on behalf of that seller.\563\ In setting out the proposed prohibition,
the Commission noted that during the Rule Review, numerous individual
consumers had complained about being hung up on when they asked to be
placed on a ``do-not-call'' list. In other instances, consumers
complained that the telemarketer had used other means to hamper or
impede these consumers' attempts to be placed on a ``do-not-call''
list. Participants in both the ``Do-Not-Call'' Forum and the Rule
Review Forum echoed these complaints.\564\
---------------------------------------------------------------------------
\563\ 67 FR at 4516.
\564\ Id.
---------------------------------------------------------------------------
A seller or telemarketer has an affirmative duty under the Rule to
accept a ``do-not-call'' request, and to process that request. Failure
to do so by impeding, denying, or otherwise interfering with an attempt
to make such a request clearly would defeat the purpose of the ``do-
not-call'' provision, and would frustrate the intent of the
Telemarketing Act to curtail telemarketers from undertaking unsolicited
telephone calls which the reasonable consumer would consider coercive
or abusive of the consumer's right to privacy.\565\
---------------------------------------------------------------------------
\565\ 15 U.S.C. 6102(a)(3)(A).
---------------------------------------------------------------------------
Those commenters who addressed this provision strongly supported
the prohibition.\566\ For example, NAAG stated that an express
prohibition against denying or interfering with a consumer's right to
be added to a company-specific ``do-not-call'' list clarifies the
seriousness of the telemarketer's obligation to process the consumer's
request and will raise confidence in the system.\567\
---------------------------------------------------------------------------
\566\ See, e.g., ARDA-NPRM at 6; Assurant-NPRM at 7; NAAG-NPRM
at 44; NCL-NPRM at 8; NYSCPB-NPRM at 5-6; Proctor-NPRM at 4.
\567\ NAAG-NPRM at 44. See also NCL-NPRM at 8.
---------------------------------------------------------------------------
NAAG noted that the consumer who receives the telemarketing call
generally must rely exclusively on the telemarketer's truthful
disclosure of his or her identity and the nature of the call, and that
consumers are often confused because many company names are very
similar.\568\ In this respect, the Commission's determination to
require telemarketers to transmit Caller ID information, discussed
above, will provide a valuable tool to both consumers and law
enforcement agencies in identifying those telemarketers who fail to
comply with their obligation to process the consumer's request.
---------------------------------------------------------------------------
\568\ NAAG-NPRM at 44.
---------------------------------------------------------------------------
Therefore, the Commission has determined that it is an abusive
telemarketing act or practice to deny or interfere in any way with a
person's right to be placed on a ``do-not-call'' list, including
hanging up on the individual when he or she initiates such a request.
Section 310.4(b)(1)(ii) of the amended Rule prohibits this practice,
and encompasses both telemarketers soliciting the purchase of goods or
services and those soliciting charitable contributions in accordance
with the USA PATRIOT Act amendments.\569\ In addition, Sec.
310.4(b)(1)(ii) prohibits anyone from directing another person to deny
or interfere with a person's right to be placed on a ``do-not-call''
list. This aspect of the provision is intended to ensure that sellers
who use third-party telemarketers cannot shield themselves from
liability under this provision by suggesting that the violation was a
single act by a ``rogue'' telemarketer where there is evidence that the
seller caused the telemarketer to deny or defeat ``do-not-call''
requests.\570\
---------------------------------------------------------------------------
\569\ Moreover, the Rule Review yielded evidence that, in some
instances, telemarketers soliciting charitable contributions are
unwilling to honor donors' ``do-not-call'' requests, even when
threatened with withdrawal of future support. See Peters-RR at 1.
\570\ Because the USA PATRIOT Act amendments do not give the
Commission jurisdiction over non-profit organizations, the
prohibition against causing a telemarketer to deny or defeat ``do-
not-call'' requests applies only to sellers of goods or services,
not to non-profit organizations.
---------------------------------------------------------------------------
Sec. 310.4(b)(1)(iii) -- ``Do-not-call''
The original Rule prohibited a seller or telemarketer from calling
a person who had previously asked not to be called by or on behalf of
the seller whose goods or services were offered.\571\ The proposed Rule
added a second ``do-not-call'' provision that would prohibit a seller
or telemarketer from calling a consumer who had placed his or her name
and/or telephone number on a centralized registry maintained by the
Commission, unless the consumer had provided express authorization for
the seller to call him or her.\572\ To effectuate the USA PATRIOT Act
amendments, the Commission also proposed that for-profit telemarketers
who solicit charitable donations be subject to the proposed national
registry.\573\
---------------------------------------------------------------------------
\571\ 16 CFR 310.4(b)(1)(ii). This is termed a ``company-
specific'' approach to eliminating unwanted telephone solicitations.
\572\ Proposed Rule Sec. Sec. 310.4(b)(1)(iii)(B) and
310.4(b)(1)(iii)(B)(1) and (2).
\573\ 67 FR at 4516, 4519.
---------------------------------------------------------------------------
The national ``do-not-call'' registry proposal generated extensive
comment.\574\ Consumer and privacy advocates, as well as individual
consumers, overwhelmingly supported the creation of such a
registry.\575\
[[Continued on page 4629]]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]
[[pp. 4629-4679]] Telemarketing Sales Rule
[[Continued from page 4628]]
[[Page 4629]]
Indeed, many recommended that the Commission take a more restrictive
``opt-in'' approach, and prohibit telemarketing except to those
consumers who expressly agree in advance to accept sales calls.\576\
State regulators also supported a national registry, provided it did
not preempt the ``do-not-call'' legislation already passed in many
states or preclude the states from enforcing these laws.\577\
---------------------------------------------------------------------------
\574\ As discussed above, the Commission received about 64,000
written and electronic comments in response to the NPRM, including
over 45 supplemental comments from organizations and individuals and
almost 15,000 comments from Gottschalks' customers that were
submitted by Gottschalks as its supplemental comment. The vast
majority of comments touched, at least in part, on the proposed
national ``do-not-call'' registry.
\575\ See, e.g., DOJ-NPRM at 4-5; EPIC-NPRM at 2-3; LSAP-NPRM at
12; NAAG-NPRM at 4, 6, 12, 29; NACAA-NPRM at 2; NCLC-NPRM at 13;
NCL-NPRM at 8; NFPPA-NPRM at 1; Pelland-NPRM passim; Proctor-NPRM
passim; PRC-NPRM at 2; Private Citizen-NPRM at 1; TDI-NPRM at 4-5;
Worsham-NPRM at 1. Of the approximately 49,000 comments, about
33,000 supported the creation of a national registry, while about
13,700 opposed it. Of the 14,700 comments from Gottschalks''
customers, almost 11,500 supported the creation of a ``do-not-call''
registry, while only about 1800 opposed the idea of a registry.
\576\ See, e.g., EPIC-NPRM at 4; NCL-NPRM at 8.
\577\ See, e.g., Connecticut-NPRM at 1-2, 3; DC-NPRM at 4;
Kansas-NPRM at 2; NAAG-NPRM at 4-29; NYSCPB-NPRM at 1; Tennessee-
NPRM at 2, 9-10; Texas PUC-NPRM at 1, 2; Virginia-NPRM at 1-2. See
also AARP-NPRM at 1; NCL-NPRM at 9-10; NCLC-NPRM at 13; PRC-NPRM at
4; Private Citizen-NPRM at 2; TDI-NPRM at 4-5.
---------------------------------------------------------------------------
A number of industry commenters supported the general concept of a
national ``do-not-call'' registry that would preempt state ``do-not-
call'' laws, provided an exemption for ``existing business
relationships'' were added to the Rule. The need for an established
business relationship exemption was the most emphatic and consistent
theme of industry comments, but other points were raised as well. Some
questioned whether the Commission had the statutory authority to
establish such a registry.\578\ Others argued that a national ``do-not-
call'' registry would impose an unconstitutional restriction on
commercial speech.\579\ Still others felt that an FTC registry was not
necessary because the current system was sufficient to protect consumer
privacy.\580\ These commenters supported increased enforcement of
existing federal and state ``do-not-call'' laws. Charitable
organizations and the telemarketers who serve them uniformly opposed
the national ``do-not-call'' registry proposal if applicable to
charitable solicitations by for-profit telemarketers. They argued that
such a registry would violate the First Amendment and that it would
have a devastating impact on the level of contributions that non-profit
organizations depend upon to fulfill their missions.\581\
---------------------------------------------------------------------------
\578\ See, e.g., Discover-NPRM at 2; ERA-NPRM at 26; NRF-NPRM at
2-3; NAA-NPRM at 2; Paramount-NPRM at 1; PMA-NPRM at 6, 24-26.
\579\ See, e.g., NAA-NPRM at 2; Paramount-NPRM at 2; PBP-NPRM
passim; Redish-NPRM passim.
\580\ See, e.g., Craftmatic-NPRM at 3; ERA-NPRM at 5, 28; PMA-
NPRM at 6; TeleStar-NPRM at 2; Weber-NPRM at 2.
\581\ See, e.g., DMA-NonProfit-NPRM passim; Not-for-Profit
Coalition-NPRM passim; Hudson Bay-NPRM passim. See also June 2002
Tr. III at 110, 205-10.
---------------------------------------------------------------------------
Based on the entire record in this proceeding, the Commission has
determined to retain the provision in the original Rule that prohibits
a seller or telemarketer from calling a consumer who has previously
asked not to be called by or on behalf of that seller. The Commission
has also determined to supplement that provision by amending the Rule
to establish a national ``do-not-call'' registry. For the reasons set
forth herein, the Commission has decided to limit coverage of the
national registry to telemarketing calls made by or on behalf of
sellers of goods or services, thus exempting telemarketing calls on
behalf of charitable organizations. Calls on behalf of charitable
organizations will be subject to the company-specific ``do-not-call''
provision. In addition, the Commission has decided to retain the
provision that allows consumers who sign up on the national ``do-not-
call'' registry to provide express agreement to specific sellers to
call them, but has modified that provision to require that evidence of
such agreements be written, not oral. Furthermore, the Commission has
decided to supplement that express agreement provision with a narrowly-
defined exemption for ``established business relationships.'' The
Commission is persuaded that these provisions will work in a
complementary fashion to effectuate the appropriate balance between
protecting consumer privacy and enabling sellers to have access to
their existing customers. Of course, even a seller who is exempt from
the prohibition against calling a consumer based on the existence of an
``established business relationship'' with that consumer must honor
that consumer's direct request not to be called under the company-
specific ``do-not-call'' provision.
Background. The original Rule's company-specific approach, which
prohibited a seller or telemarketer from calling a person who had
previously asked not to be called, was intended to prohibit abusive
patterns of calls from a seller or telemarketer to a person. During the
Rule Review, industry representatives generally supported the Rule's
current company-specific approach, stating that it provides consumer
choice and satisfies the consumer protection mandate of the
Telemarketing Act while not imposing an undue burden on industry.\582\
The vast majority of individual commenters, however, joined by consumer
groups and state law enforcement representatives, claimed that the
TSR's company-specific ``do-not-call'' provision is inadequate to
prevent the abusive patterns of calls it was intended to prohibit.\583\
They cited several problems with the current ``do-not-call'' scheme as
set out in the FTC and FCC regulations:\584\ the company-specific
approach is extremely burdensome to consumers, who must repeat their
``do-not-call'' request with every telemarketer that calls;\585\
consumers' repeated requests to be placed on a ``do-not-call'' list are
ignored;\586\ consumers have no way to verify that their names have
been taken off of a company's calling list;\587\ consumers find that
using the TCPA's private right of action\588\ is very complex and time-
consuming, and places an evidentiary burden on the consumer who must
keep detailed lists of who called and when;\589\ and finally, even if
the consumer wins a lawsuit against a company, it is difficult for the
consumer to enforce the judgment.\590\
---------------------------------------------------------------------------
\582\ ARDA-RR at 2; ATA-RR at 8-10; Bell Atlantic-RR at 4; DMA-
RR at 2; ERA-RR at 6; MPA-RR at 16; NAA-RR at 2; NASAA-RR at 4; PLP-
RR at 1. See also DNC Tr. at 132-80.
\583\ See NAAG-RR at 17-19; NCL-RR at 13-14; DNC Tr. at 132-80.
See also, e.g., Anderson-RR at 1; Bennett-RR at 1; Card-RR at 1;
Conway-RR at 1; Garbin-RR at 1; A. Gardner-RR at 1; Gilchrist-RR at
1; Gindin-RR at 1; Harper-RR at 1; Heagy-RR at 1; Johnson-RR at 1;
McCurdy-RR at 1; Menefee-RR at 1; Mey-RR passim; Mitchelp-RR at 1;
Nova53-RR at 1; Peters-RR at 1; Rothman-RR at 1; Vanderburg-RR at 1;
Ver Steegt-RR at 1; Worsham-RR at 1.
\584\ The FCC's ``do-not-call'' regulations under the TCPA are
at 47 CFR 64.1201.
\585\ Garbin-RR at 1; NAAG-RR at 17; Ver Steeg-RR at 1.
\586\ Harper-RR at 1; Heagy-RR at 1; Holloway-RR at 1; Johnson-
RR at 1; Menefee-RR at 1; Mey-RR passim; Nova53-RR at 1; Nurik-RR at
1; Peters-RR at 1; Rothman-RR at 1; Runnels-RR at 1; Schiber-RR at
1; Schmied-RR at 1; Vanderburg-RR at 1.
\587\ McCurdy-RR at 1; Schiber-RR at 1.
\588\ The TCPA permits a person who receives more than one
telephone call in violation of the FCC's ``do-not-call'' regulations
to bring an action in an appropriate state court to enjoin the
practice, to receive money damages, or both. 47 U.S.C. 227(b)(3).
The consumer may recover actual monetary loss from the violation or
receive $500 in damages for each violation, whichever is greater.
Id. If the court finds that a company willfully or knowingly
violated the FCC's ``do-not-call'' rules, it can award treble
damages. Id.
\589\ Kelly-RR at 1; NAAG-RR at 17-19; NACAA-RR at 2; NCL-RR at
13-14.
\590\ Kelly-RR at 1.
---------------------------------------------------------------------------
In addition to the fact that it has proven ineffective, there is
another problem that is not even addressed by the company-specific
provision. In particular, because a great many telemarketers are now
placing huge patterns of unsolicited telemarketing calls,\591\ many
consumers find even an
[[Page 4630]]
initial call from a telemarketer or seller to be abusive and invasive
of privacy. Several states responded to the growing consumer
frustration with unsolicited telemarketing calls and the
ineffectiveness of the company-specific approach by passing legislation
to establish statewide ``do-not-call'' lists. To date, 27 states have
passed such legislation, and numerous other states have considered
similar bills.\592\
---------------------------------------------------------------------------
\591\ Based on figures provided by the telemarketing industry, a
study prepared for CCC estimates that the annual number of outbound
calls that are answered by a consumer is 16,129,411,765 (i.e., 16
billion calls). James C. Miller, III, Jonathan S. Bowater, Richard
S. Higgins, and Robert Budd, ``An Economic Assessment of Proposed
Amendments to the Telemarketing Sales Rule,'' June 5, 2002,
(hereinafter ``Miller Study'') at 28, Att. 1. This figure does not
include those calls that are abandoned.
\592\ DNC Tr. at 16, 137, 157-58. As of August, 2002, 27 states
had passed ``do-not-call'' statutes. Florida established the first
state ``do-not-call'' list in 1987. (Fla. Stat. Ann. Sec. 501.059).
Oregon and Alaska followed with ``do-not-call'' statutes in 1989.
Instead of a central registry, these two states opted to require
telephone companies to place a black dot in the telephone directory
by the names of consumers who do not wish to receive telemarketing
calls. (1999 Or. Laws 564; Alaska Stat. Ann. Sec. 45.50.475). In
1999, Oregon replaced its ``black dot'' law with a ``no-call''
central registry program. (Or. Rev. Stat. Sec. 464.567). See also
article regarding Oregon law in 78 BNA Antitrust & Trade Reg. Report
97 (Feb. 4, 2000). After those three states adopted their statutes,
there was little activity at the state level for about a decade.
Then, in 1999, a new burst of legislation occurred as five more
states passed ``do-not-call'' legislation--Alabama (Ala. Code Sec.
8-19C); Arkansas (Ark. Code Ann. Sec. 4-99-401); Georgia (Ga. Code
Ann. Sec. 46-5-27; see also rules at Ga. Comp. R. & Regs. 515-14-
1); Kentucky (Ky. Rev. Stat. Ann. Sec. 367.46955(15)); and
Tennessee (Tenn. Code Ann. Sec. 65-4-401; see also rules at Tenn.
Comp. R. & Regs. Chap. 1220-4-11). During 2000, six more states
enacted ``do-not-call'' statutes--Connecticut (Conn. Gen. Stat. Ann.
Sec. 42-288a); Idaho (Idaho Code Sec. 48-1003); Maine (Me. Rev.
Stat. Sec. 4690-A); Missouri (Mo. Rev. Stat. Sec. 407.1095); New
York (N.Y. General Business Law Sec. 399-z; see also rules at NY
Comp. R. & Regs. tit. 12 Sec. 4602); and Wyoming (Wyo. Stat. Ann.
Sec. 40-12-301). As of August, 2002, another eleven states had
joined the ranks--California (S.B. 771, to be codified at Cal. Bus.
& Prof. Code Sec. 17590); Colorado (H.B. 1405, to be codified at
Colo. Rev. Stat. Sec. 6-1-901); Illinois (S.B. 1830, signed Aug. 9,
2002); Indiana (H.B. 1222, to be codified at Ind. Code Ann. Sec.
24.4.7); Kansas (S.B. 296, to be codified at Kan . Stat. Ann. 2001
Supp. Sec. 50-670, signed May 29, 2002); Louisiana (H.B. 175, to be
codified at La. Rev. Stat. 45:844.11); Massachusetts (H.B. 5225,
signed Aug. 10, 2002); Minnesota (S.B. 3246, to be codified at Minn.
Stat. Sec. 325E.311, signed May 15, 2002); Oklahoma (S.B. 950, to
be codified at Okla. Stat. tit. 15 Sec. 775B.1, signed Apr. 15,
2002); Pennsylvania (H.B. 1469, to be codified as amendment to Pa.
Cons. Stat. Sec. 2241; Texas (H.B. 472, to be codified at Tex. Bus.
& Com. Code Ann. Sec. 43.001); Vermont (S. 62, Pub. Act 120, to be
codified at Vt. Stat. Ann. tit. 9 Sec. 2464a, signed June 5, 2002);
and Wisconsin (Section 2435 of 2001 Wisconsin Act 16, 2001 S.B. 55,
to be codified at Wis. Stat. 100.52). In addition, numerous states
are considering or recently have considered laws that would create
state-run ``do-not-call'' lists, including Arizona, Delaware,
District of Columbia, Hawaii, Illinois, Iowa, Maryland, Michigan,
Mississippi, Montana, Nebraska, Nevada, New Jersey, North Carolina,
Ohio, Rhode Island, South Carolina, South Dakota, Utah, Virginia,
Washington, and West Virginia. See CallCompliance table of state
``do-not-call'' laws and proposed legislation, http://www.callcompliance.com/pages/STATElist.html
(accessed July 24,
2002). The ``do-not-call'' issue has also drawn the attention of
federal legislators, who have introduced several bills aimed at
addressing consumers' concerns. For example, in the 106th Congress,
H.R. 3180 (introduced by Rep. Salmon) would have required
telemarketers to tell consumers that they have a right to be placed
on either the DMA's ``do-not-call'' list or on their state's ``do-
not-call'' list. This proposal also would have required all
telemarketers to obtain and reconcile the DMA and state ``do-not-
call'' lists with their call lists. Similar legislation was
introduced in the 107th Congress by Rep. King (H.R. 232, the
``Telemarketing Victim Protection Act''). In addition, on December
20, 2001, Sen. Dodd introduced S. 1881, the ``Telemarketing
Intrusive Practices Act of 2001,'' which would require the FTC to
establish a national ``do-not-call'' registry.
---------------------------------------------------------------------------
The comments received in response to the NPRM show that frustration
with unsolicited telemarketing calls continues despite the efforts of
the DMA, the states, and the TCPA/TSR company-specific approaches to
the problem. Individual commenters overwhelmingly supported the
establishment of a national ``do-not-call'' registry.\593\ This was
true even of those individuals who were already signed up on their
state's ``do-not-call'' registry or on the DMA's TPS.\594\ Although
many of these individuals stated that they had found their state
registry to be effective in reducing the number of unwanted calls, they
thought that a national registry would be a beneficial addition to
their state registry because, among other things, a central registry
would eliminate some of the loopholes in the state laws, thus
increasing coverage, and would provide the convenience of a one-stop
method of reducing unwanted calls.\595\ Similarly, individuals who were
signed up on the DMA's TPS list also said that the list had been
effective in reducing the number of unwanted calls, yet they felt that
a national registry was needed because they were still receiving
unwanted calls.\596\
---------------------------------------------------------------------------
\593\ The Commission received approximately 64,000 email and
written comments. Of those, approximately 44,000 supported the
proposed national ``do-not-call'' registry, while only about 15,000
opposed the creation of such a registry. (The remaining 5,000
comments did not address this issue.)
\594\ The Commission received approximately 7,500 comments from
consumers who live in states that have ``do-not-call'' statutes.
See, e.g., Dan Seaman (AL) (Msg. 1127); Shawn Baumgartner (FL) (Msg.
2771); Edwin Rodriguez (CO) (Msg. 4573); Michelle Crouch (GA) (Msg.
4973); and Rona Owen (TX) (Msg. 6247).
\595\ See, e.g., Michelle Crouch (GA) (Msg. 4973); Dan Seaman
(AL) (Msg. 1127) (state registry has too many exemptions); Clive and
Jane Romig (FL) (Msg. 19125) (current remedies are inadequate).
\596\ See, e.g., Robert Winters (Msg. 18984) (resurgence of
calls after a while); Gregory Stahmer (Feb. 21, Part 6, Msg. 150)
(continues to get unwanted calls); Robert Baly (Feb. 27, Part 1,
Msg. 551).
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Consumer groups supported the creation of a national ``do-not-
call'' registry,\597\ and some privacy advocates urged the Commission
to take an even more restrictive ``opt-in'' approach by banning
telemarketing to any consumer who has not expressly agreed to receive
telephone solicitations.\598\ With certain caveats, state regulators
also supported the proposal for a national ``do-not-call''
registry.\599\ Some states that already have a state ``do-not-call''
list in place indicated that a national list would complement the
current regime of state legislation and could be an effective addition
to the arsenal of tools available to consumers in reducing unwanted
calls.\600\ However, states and consumer advocates cautioned that such
a system should be implemented in close coordination with the states
and should not supplant more restrictive state laws.\601\
---------------------------------------------------------------------------
\597\ AARP-NPRM at 1; CCA-NPRM at 1; ConsumerPrivacyGuide.com-
NPRM at 1; EPIC-NPRM at 2-3; LSAP-NPRM at 12-15; NAAG-NPRM at 4;
NACAA-NPRM at 2; NARUC-NPRM at 1, 3; NASUCA-NPRM at 2; NCL-NPRM at
8; NCLC-NPRM at 13; PRC-NPRM at 1; Worsham-NPRM at 1. The U.S.
Department of Justice also supported the creation of a national
``do-not-call'' list maintained by the FTC. DOJ-NPRM at 4-5.
\598\ See, e.g., EPIC-NPRM at 3; Worsham-NPRM at 5.
\599\ See, e.g., CCA-NPRM at 1; Connecticut-NPRM at 1-2, 3; DC-
NPRM at 4; Kansas-NPRM at 2; NAAG-NPRM at 4-29; NYSCPB-NPRM at 1-2;
Tennessee-NPRM at 2; Texas PUC-NPRM at 1, 2; Virginia-NPRM at 1-2.
\600\ CCA-NPRM at 1; Connecticut-NPRM at 1; Kansas-NPRM at 1;
NAAG-NPRM at 6, 12, 29; NYSCPB-NPRM at 1-2; Tennessee-NPRM at 2.
\601\ Connecticut-NPRM at 1-2, 3; Kansas-NPRM at 1; NAAG-NPRM at
6-13; NACAA-NPRM at 4-5; NCL-NPRM at 9; NYSCPB-NPRM at 2-4, 13-17;
Private Citizen-NPRM at 2; Tennessee-NPRM at 2, 9-10; Texas PUC-NPRM
at 3-4. See also June 2002 Tr. I at 19-40.
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Industry commenters generally believed that the current system is
working and that a national ``do-not-call'' registry is
unnecessary.\602\ They expressed the view that the DMA's Telephone
Preference Service (``TPS'') is tantamount to a national ``do-not-
call'' registry. In fact, according to their comments, the TPS has
greater coverage than the FTC registry would have because it covers
certain entities such as common carriers, banks, and charitable
organizations beyond FTC jurisdiction.\603\ They argued that these
[[Page 4631]]
gaps in the national registry's coverage due to the FTC's limited
jurisdiction would make a national ``do-not-call'' list more confusing
than helpful to consumers.\604\ Some industry members suggested that
the states are the more appropriate forum for creation of ``do-not-
call'' lists.\605\ Some of these commenters argued that, unlike a
national list, that must be ``one size fits all,'' states can be more
responsive to the needs of their citizens and tailor their lists to
those differing needs.\606\
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\602\ See, e.g., ATA-NPRM at 21-25; Craftmatic-NPRM at 3; DMA-
NPRM at 7-8; ERA-NPRM at 5, 28; Fleet-NPRM at 2; Green Mountain-NPRM
at 21-23; Lenox-NPRM at 4-5; MPA-NPRM at 34-35; Noble-NPRM at 2;
NATN-NPRM at 2; NSDI-NPRM at 3; Pacesetter-NPRM at 2-3; PMA-NPRM at
6; Synergy Solutions-NPRM at 2; Technion-NPRM at 4; Teleperformance-
NPRM at 2; TeleStar-NPRM at 2; TRC-NPRM at 2; Weber-NPRM at 2.
\603\ See, e.g., ATA-NPRM at 24-25; DMA-NPRM at 8-11; ERA-NPRM
at 27-28; MPA-NPRM at 34-35; Noble-NPRM at 2; NATN-NPRM at 2; NSDI-
NPRM at 3; Synergy Solutions-NPRM at 2; Technion-NPRM at 4;
Teleperformance-NPRM at 2; TRC-NPRM at 2.
\604\ See, e.g., ERA-NPRM at 28, 36; MPA-NPRM at 34-35; Noble-
NPRM at 2; NATN-NPRM at 2; NSDI-NPRM at 3; Synergy Solutions-NPRM at
2; Technion-NPRM at 4; Teleperformance-NPRM at 2; TRC-NPRM at 2.
\605\ See, e.g., ATA-NPRM at 23-25; Noble-NPRM at 2; NATN-NPRM
at 2; NSDI-NPRM at 3; possibleNOW.com-NPRM at 1; Success Marketing-
NPRM at 2; Synergy Solutions-NPRM at 2; Technion-NPRM at 4;
Teleperformance-NPRM at 2; TRC-NPRM at 2. See also Tennessee-NPRM at
6-7.
\606\ See, e.g., ATA-NPRM at 23-25; Noble-NPRM at 2; NATN-NPRM
at 2; NEMA-NPRM at 4; NSDI-NPRM at 3; possibleNOW.com-NPRM at 1;
Success Marketing-NPRM at 2; Synergy Solutions-NPRM at 3;
Teleperformance-NPRM at 2; TRC-NPRM at 2. See also Tennessee-NPRM at
6-7.
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The record in this matter overwhelmingly shows the contrary--as
detailed earlier, it shows that the company-specific approach is
seriously inadequate to protect consumers' privacy from an abusive
pattern of calls placed by a seller or telemarketer. The comments also
show that consumers continue to be angered by and frustrated with the
pattern of unsolicited telemarketing calls they receive from the
multitude of sellers and telemarketers. A national ``do-not-call''
registry addresses both types of abuse. It provides a mechanism that a
consumer may use to indicate that he or she finds unsolicited
telemarketing calls abusive and an invasion of privacy. It will also
protect a consumer from repeated abusive calls from a seller or
telemarketer. These problems cannot be fully addressed by state lists.
While state ``do-not-call'' lists may be effective in reducing calls
for the citizens in those states, about half the states do not have
such legislation. A federal list would protect those consumers who are
not currently protected. In addition, as EPIC pointed out in its
comment, the state ``do-not-call'' lists vary with regard to exempt
entities, with some containing so many exemptions that virtually all
telemarketers are exempt.\607\ A federal list would provide uniformity
with regard to those entities within the FTC's jurisdiction. Finally,
although industry touts the state lists as the appropriate approach to
``do-not-call,'' they also challenge the states' authority to regulate
interstate calls under the state ``do-not-call'' laws.\608\ The
Telemarketing Act grants the states the authority to enforce the TSR in
federal court.\609\ Therefore, a national ``do-not-call'' registry
maintained by the FTC pursuant to the TSR (and enforceable by the
states) would quell any challenges to state ``do-not-call'' enforcement
with respect to interstate telemarketing.
---------------------------------------------------------------------------
\607\ EPIC-NPRM at 19.
\608\ See, e.g., ATA-NPRM at 24.
\609\ 15 U.S.C. 6108.
---------------------------------------------------------------------------
Some industry members would have the FTC forget about a national
registry and continue to let consumers use the current national self-
regulatory system set up through DMA's TPS.\610\ DMA has provided an
important public service by administering the TPS, and the Commission
applauds the efforts of the industry to regulate itself. However, the
self-regulatory model has two serious shortcomings which limit its use
as an effective national ``do-not-call'' registry: a self-regulatory
system is voluntary; and to the extent that sanctions exist for non-
compliance, DMA may apply those sanctions only against its members, not
non-members.\611\ On the other hand, lists established pursuant to the
FTC Act and the Telemarketing Act, as well as those established
pursuant to state law, have the force of law, and violators are subject
to civil penalties. This type of sanction makes it more likely that
companies will take their ``do-not-call'' obligations seriously.
---------------------------------------------------------------------------
\610\ See, e.g., ATA-NPRM at 21-25; Craftmatic-NPRM at 3; DMA-
NPRM at 7-8; ERA-NPRM at 5, 28; Fleet-NPRM at 2; Green Mountain-NPRM
at 21-23; Lenox-NPRM at 4-5; MPA-NPRM at 34-35; Noble-NPRM at 2;
NATN-NPRM at 2; NSDI-NPRM at 3; Pacesetter-NPRM at 2-3; PMA-NPRM at
6; Synergy Solutions-NPRM at 2; Technion-NPRM at 4; Teleperformance-
NPRM at 2; TeleStar-NPRM at 2; TRC-NPRM at 2; Weber-NPRM at 2.
\611\ DMA has about 5,000 members. DMA-NPRM at 1.
---------------------------------------------------------------------------
The Commission recognizes that its jurisdictional limitations will
impact the effectiveness of a national ``do-not-call'' registry.
However, the Commission notes that while certain specific entities are
exempt from coverage, the telemarketing companies that solicit on their
behalf are nonetheless covered by the TSR.\612\ Moreover, many
consumers have signed up for state ``do-not-call'' lists,\613\ all of
which include various exemptions. Consumers in those states have
accepted the limitations of the state ``do-not-call'' lists and have
been satisfied at the prospect of at least reducing the number of
unwanted telephone solicitations that they receive.\614\ Indeed, an FTC
registry may be more inclusive than some state ``do-not-call''
lists.\615\ The Commission believes that consumer education will
minimize consumer confusion over what calls will and will not be
allowed under a national ``do-not-call'' registry.
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\612\ 67 FR at 4497.
\613\ For example, Missouri and Indiana each have more than 1
million telephone numbers on their lists; New York's list contains
more than 2 million numbers. See Missouri No Call Tops 1 Million
Three Days Before One-Year Anniversary of Law, Office of Missouri
Attorney General, June 28, 2002, http://www.ago.state.mo.us/062802.htm
; and David Wessel, On Hold: Gagging the Telemarketers,
WALL ST. J., Apr. 11, 2002, at A2. See also NAAG-NPRM at 4, n.3.
\614\ See generally June 2002 Tr. I at 110-21.
\615\ See EPIC-NPRM at 19 (noting that some state laws are
ineffective due to the number of exempted entities).
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Industry pointed to the economic importance of outbound
telemarketing, which accounted for $274.2 billion in 2001,\616\ and
warned that a national ``do-not-call'' registry would have dire
economic consequences.\617\ In its supplemental comments, DMA submitted
a study showing ``the face of the telemarketing industry.''\618\
According to DMA predictions, job losses would impact most seriously on
women, minorities, and rural areas--the groups and regions from which
most telemarketers are drawn.\619\ Individual sellers and telemarketing
firms estimated that they might have to lay off up to 50 percent of
their employees if such a registry were to go into effect.\620\
Numerous individual telemarketers submitted comments in which they
talked about the pride they have in their work and their fear of losing
their livelihood.\621\
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\616\ DMA, ``The Faces and Places of Outbound Telemarketing in
the United States,'' (June 2002) (``DMA study'') at 1.
\617\ See id. See also NATN-NPRM at 1; NSDI-NPRM at 2; Success
Marketing-NPRM at 2; Synergy Solutions-NPRM at 1.
\618\ DMA study, see note 616 above.
\619\ The DMA study indicates that teleservices workers are
overwhelmingly female, high-school educated, and African-American or
Hispanic. Almost 62 percent of all females working as teleservices
agents are working mothers, and 30 percent are part of a welfare-to-
work program or were recently on public assistance. DMA study at 2.
The study also indicates that outbound telemarketing call centers
can be found in every state, often in rural areas or small towns and
cities that are economically distressed. Id. at 4. See also NATN-
NPRM at 1; NSDI-NPRM at 2; Success Marketing-NPRM at 2; Synergy
Solutions-NPRM at 1.
\620\ See NATN-NPRM at 1; NSDI-NPRM at 2; Success Marketing-NPRM
at 2; Synergy Solutions-NPRM at 1; Teleperformance-NPRM at 2; TRC-
NPRM at 2-3. However, the Commission notes that these companies
offered no analysis to substantiate their claims regarding the
impact of the national registry.
\621\ See, e.g., Alhafez (Mar. 22, part 1, Msg. 1712); Cameron
(Mar. 6, part 1, Msg. 951); Dillon (Mar. 21, part 2, Msg. 1622). See
also, e.g., ACI Telecentrics-Levie (Msg. 19322); InfoCision
Management-Davis (Msg. 23968); HFC-Beneficial-Darst (Msg. 33709);
Household-Alioto (Msg. 27876); LTD Direct-Rockwood (Msg. 27601); and
TCIM Services Inc.-Davis (Msg. 22871).
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[[Page 4632]]
The Commission recognizes that telemarketing is a legitimate method
of selling goods and services. It is important to remember that the
``do-not-call'' registry will impact only outbound telemarketing, and
will have no effect whatsoever on the greater portion of the industry
devoted to inbound calls from consumers.\622\ The Commission also
recognizes the importance of outbound telemarketing to federal, state,
and local economies. Telemarketing provides needed jobs to rural areas
and small towns that often face high unemployment, and to people who
often face difficulties in obtaining other employment, such as
individuals moving off of welfare.
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\622\ In 2001, inbound telemarketing accounted for 55 percent of
total teleservice expenditures and was expected to grow to 62
percent by 2004. Winterberry Group, ``Industry Map: Teleservice
Industry--Multi-Channel Marketing Drives Universal Call Centers'' at
9 (Jan. 2001).
---------------------------------------------------------------------------
Although industry fears the economic impact a national registry
might have, ironically, an FTC ``do-not-call'' registry may actually
benefit rather than harm industry. For example, the federal framework,
with its exemptions, would provide greater consistency of coverage, at
least with regard to interstate calls. In addition, industry would
benefit because telemarketers would reduce time spent calling consumers
who do not want to receive telemarketing calls and would be able to
focus their calls only on those who do not object to such calls.\623\
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\623\ Industry representatives also have indicated that they do
not wish to call consumers who do not want to receive telemarketing
calls. See DNC Tr. at 41, 51, 53-56, 61, 71.
---------------------------------------------------------------------------
Industry emphasized the importance of harmonizing federal and state
laws. To the extent that industry members supported creation of a
national ``do-not-call'' list, they conditioned their support on
preemption of state laws.\624\ These commenters argued that the major,
if not only, benefit to industry from a national ``do-not-call''
registry would be to eliminate the costs of purchasing multiple lists
and complying with a patchwork of potentially 50 different state
laws.\625\ Absent preemption, industry believed that a national
registry would only add another layer of bureaucracy and one more list
that they must purchase.\626\ The June 2002 Forum discussed in depth
the interplay between the national ``do-not-call'' registry and state
laws. Participants agreed that the Commission should seek comity with
state laws, and that a single list would provide substantial benefits
to both industry and consumers.\627\
---------------------------------------------------------------------------
\624\ See, e.g., AFSA-NPRM at 3-5; Craftmatic-NPRM at 3;
Discover-NPRM at 2; HSBC-NPRM at 1; MBA-NPRM at 2; NCTA-NPRM at 15-
16; NRF-NPRM at 7-8; Nextel-NPRM at 3-4, 26-27; PMA-NPRM at 28;
SIIA-NPRM at 3; Time-NPRM at 3-4; Community Bankers-Supp. at 4;
ARDA-Supp. at 1; ICTA-Supp. at 1. See also June 2002 Tr. at 19-40.
\625\ See, e.g., AFSA-NPRM at 3-5; Craftmatic-NPRM at 3;
Discover-NPRM at 2; HSBC-NPRM at 1; MBA-NPRM at 2; NCTA-NPRM at 15-
16; NRF-NPRM at 7-8; Nextel-NPRM at 3-4, 26-27; PMA-NPRM at 28;
SIIA-NPRM at 3; Time-NPRM at 3-4.
\626\ Id.
\627\ See June 2002 Tr. I at 19-40.
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For example, Dr. James Miller, testifying on behalf of CCC,
estimated that if the Commission's ``do-not-call'' proposal were
enacted as proposed, it would cost all firms that sell their products
via outbound telemarketing combined a total of $6.6 million to purchase
access to the FTC's ``do-not-call'' registry and to check their calling
lists against the ``do-not-call'' list to ensure that they do not call
consumers who have asked not to be called.\628\ If companies could
comply with both FTC and state regulations by purchasing access to the
FTC's list and not calling consumers whose numbers appeared on that
list, this would represent the total burden on firms to avoid calling
consumers who did not wish to be called. However, Dr. Miller testified
that the total cost to comply with the state regulations as well as the
FTC requirements, should firms still have to purchase separate lists
from each state having its own do-not-call provisions, could
approximate $100 million.\629\
---------------------------------------------------------------------------
\628\ See June 2002 Tr. I at 209. Dr. Miller's testimony drew
from the Miller Study (see note 591 above). As the study explains,
the $6.6 million figure assumes that 3,000 firms will pay $1,000
each on average to obtain access to the list and that it will take
the average firm approximately two hours of effort at a cost of $50
per hour each time it is necessary to compare the firm's calling
list against the ``do-not-call'' registry. As proposed in the NPRM,
firms would have been required to do this comparison 12 times each
year so that the average firm would have incurred a total expense of
$2,200. Miller Study at 11-12. Because the amended Rule does not
require firms to compare their calling lists to the FTC's ``do-not-
call'' registry monthly as did the NPRM proposal, the estimated cost
using Dr. Miller's methodology would now be around $4.5 million.
\629\ See June 2002 Tr. I at 209.
---------------------------------------------------------------------------
Finally, commenters raised various issues and offered suggestions
relating to the implementation of a national ``do-not-call'' registry.
For example, various commenters questioned the accuracy of automatic
number identification (``ANI'') verification, the length of time a
consumer's telephone number should remain on the list, who should be
able to sign up for the list, whether the Commission should allow third
parties to submit telephone numbers, the type of information that
should be collected, and the accuracy of the Commission's cost
estimates.\630\ These issues are discussed in the section below
addressing implementation.
---------------------------------------------------------------------------
\630\ See, e.g., AFSA-NPRM at 4-10; Craftmatic-NPRM at 3; DC-
NPRM at 5; DialAmerica-NPRM at 13; Discover-NPRM at 3; EPIC-NPRM at
14; ERA-NPRM at 29-32; HSBC-NPRM at 2; MBA-NPRM at 2; NYSCPB-NPRM at
7-13. See also June 2002 Tr. I at 138-271.
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Coverage of the ``do-not-call'' provisions. A number of commenters
asked the Commission to clarify coverage of its ``do-not-call''
provisions. Some queried whether calls to home businesses would be
subject to the ``do-not-call'' requirements.\631\ The Rule exempts
telemarketing calls to businesses (except for sellers or telemarketers
of nondurable office or cleaning supplies). Therefore, calls to home
businesses would not be subject to the amended Rule's ``do-not-call''
requirements.
---------------------------------------------------------------------------
\631\ See, e.g., IBM-NPRM at 11-12; Pelland-NPRM at 3.
---------------------------------------------------------------------------
Some commenters asked whether the ``do-not-call'' requirements
would cover calls to cellular or wireless telephones and pagers. The
Commission intends that Sec. 310.4(b)(1)(iii) apply to any call placed
to a consumer, whether to a residential telephone number or to the
consumer's cellular telephone or pager. Consumers are increasingly
using cellular telephones in place of regular telephone service,\632\
which is borne out by the dramatic increase in cellular phone
usage.\633\ The Commission believes that it is particularly important
to allow consumers an option to reduce unwanted telemarketing calls to
cellular telephones or to pagers because some cellular services charge
the consumer for incoming calls, thus adding insult to injury when the
consumer is charged for
[[Page 4633]]
the unwanted telemarketing call to the consumer's cellular
telephone.\634\
---------------------------------------------------------------------------
\632\ See FCC Notice of Proposed Rulemaking and Memorandum
Opinion and Order in the Matter of Rules and Regulations
Implementing the Telephone Consumer Protection Act of 1991, CG
Docket No. 02-278, CC Docket No. 92-90 (Sept. 18, 2002) (hereinafter
``FCC TCPA 2002'') at 27, para. 42 (citing a USA Today/CNN/Gallop
poll showing that one in five mobile telephone users use their
wireless phone as their primary phone, Michelle Kessler, 18 % See
Cellphones as Their Main Phone, USA TODAY, Feb. 1, 2002). See also
Wendy Ruenzel, More Cell Phone Users Dispense with Traditional Phone
Line, POST CRESCENT, Aug. 6, 2001; Simon Romero, When the Cellphone
Is the Home Phone, N.Y. TIMES, Aug. 29, 2002; Joelle Tessler, Small
But Growing Number of Cell Phone Users Abandon Land Lines, SAN JOSE
MERCURY NEWS, Aug. 15, 2002.
\633\ See FCC TCPA 2002 at 26-27, para. 42, n.160 (noting that,
in the ten-year period between 1991 and 2001, the number of wireless
subscribers increased from about 7.5 million to approximately 128
million. From 1993 to 2001, the average minutes of use per
subscriber per month increased from 140 minutes to 385 minutes.)
(citations omitted).
\634\ See, e.g., Andy Vuong, Telemarketers tap cellphone:
Complaints on rise as solicitors dial into no-call exemption, DENVER
POST, July 30, 2002; Jennifer Bayot, Now, That Ringing Cellphone May
Be a Telemarketer's Call, N.Y. TIMES, July 5, 2002.
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Established business relationship. Industry commenters
overwhelmingly opposed as unworkable the Commission's proposal to allow
consumers to give their express authorization to companies from which
they wished to receive calls. Industry stated that it would be cost
prohibitive for them to contact their customers to obtain authorization
(although they provided no detailed support for this argument) and that
consumer inertia would keep consumers from independently providing that
type of affirmative authorization.\635\ They also argued that consumers
may not know in advance which companies they want to hear from.\636\
---------------------------------------------------------------------------
\635\ See, e.g., AFSA-NPRM at 8; BofA-NPRM at 9; Cox-NPRM at 6;
MBA-NPRM at 5.
\636\ See, e.g., DialAmerica-NPRM at 14; Roundtable-NPRM at 4-5.
---------------------------------------------------------------------------
Industry commenters noted that, without an exemption permitting
calls to existing customers, companies would be unable to conduct
normal servicing of customers' accounts, since such customer service
calls frequently are multiple purpose calls that also include attempts
to sell additional goods or services to the customer.\637\
Additionally, magazines and newspapers would be unable to contact
consumers whose subscriptions had expired to offer them a new
subscription.\638\ Commenters from financial institutions pointed out
that, if not permitted to call current customers, they may run afoul of
their fiduciary relationship with those customers.\639\ Sellers argued
that it would be cost prohibitive for them to use direct mail or other
means to contact their customers to obtain authorization to call.\640\
---------------------------------------------------------------------------
\637\ See, e.g., ACA-NPRM at 2; ARDA-NPRM at 17; Associations-
NPRM at 2; Cendant-NPRM at 5; Comcast-NPRM at 2; DMA-NPRM at 34;
HSBC-NPRM at 1; MBA-NPRM at 1-2.
\638\ See NAA-NPRM at 12, June 28-Supp. at 1, and July 31-Supp.
at 1; NNA-NPRM at 3.
\639\ See, e.g., ABA-NPRM at 10; ABIA-NPRM at 4; AFSA-NPRM at
13-14; AmEx-NPRM at 3; BofA-NPRM at 3; Bank One-NPRM at 4-5; VISA-
NPRM at 13; Wells Fargo-NPRM at 4. However, unless such a customer
service call includes an inducement to purchase additional goods or
services, it would fall outside the definition of ``telemarketing''
and, therefore, beyond the scope of the Rule's coverage.
\640\ See, e.g., Comcast-NPRM at 2; CAP-Supp. at 1-2.
---------------------------------------------------------------------------
Industry commenters also pointed out that, in failing to include an
exemption for existing business relationships, the proposed Rule was at
odds with the approach taken by the states with regard to ``do-not-
call'' registries. All state ``do-not-call'' laws, except Indiana's,
include such an exemption.\641\ State regulators noted that there have
been few complaints from consumers about calls from companies with whom
they have an existing business relationship.\642\ In addition, FCC
regulations under the TCPA exempt ``established business
relationships'' from the company-specific ``do-not-call''
regulations.\643\ Individual commenters who expressed an opinion on
this issue were divided on whether there should be such an exemption.
Analysis of individual consumer comments that touched on this issue
indicates that about 860 favored an exemption for calls from firms with
whom they already have an established relationship, while about 1080
opposed such an exemption.\644\ Furthermore, over 13,000 of the nearly
15,000 comments submitted by Gottschalks' customers supported allowing
Gottschalks to call them even if they signed up on a ``do-not-call''
registry to block other calls.
---------------------------------------------------------------------------
\641\ See, e.g., Ark. Code Ann. Sec. 4-99-403(2)(A); Colo. Rev.
Stat. Sec. 6-1-903(10)(B)(II); Conn. Gen. Stat. Ann. Sec. 42-
288a(a)(9); Fla. Stat. Ann. Sec. 501.059(1)(c); Ga. Code Ann. Sec.
46-5-27(b)(3)(B); Mo. Rev. Stat. Sec. 407.1095(3)(b); and Tenn.
Code Ann. Sec. 65-4-401(6)(B)(iii).
\642\ See June 2002 Tr. I at 118 (New York: ``Well, [consumers
are not unhappy], and a lot of times they complain, and you could
say that's prima facie evidence they're unhappy. We call them back
and say, gee, did you have a transaction with these folks? They
claim you did on X, Y and Z, and they furnished us this paperwork.
And then they say, oh, yeah. They don't seem to be mad.''); June
2002 Tr. I at 118-19 (Missouri: ``Most people when you call them
back are delighted that 70 to 80 percent of their phone calls have
been caused to not come in, so when we explain to them that you had
a relationship or you explain to them that some of these calls are
exempt, they understand when you explain that to them, and they're
delighted, because our anecdotal information shows that 70 to 80
percent of the calls people had been receiving, they're not
receiving now.''); and see generally, June 2002 Tr. I at 110-21.
\643\ 47 CFR 64.1200(c)(3). The TCPA requires such an exemption.
47 U.S.C. 227(a)(3).
\644\ See, e.g., GBELois (Msg. 44) (``If a person is a member,
subscriber, current customer, etc., of a company and the company is
calling regarding the status of that relationship then the company
should not be obligated to conform to the do not call registry.'');
Jerry Warnke (Msg. 371) (``Have to be a way to exempt businesses or
organizations when they are returning your phone calls or they have
a need to call you with an ongoing relationship.''). But see, e.g.,
Karl Engelberger (Msg. 331) (``All pre-existing agreements and
relationships should be voided and can, at the line subscribers
discretion be re-established.''); Don Price (Msg. 483) (``Sometimes
pre-existing relationships are those hardest to communicate with
regarding the fact that the individual wants to end the relationship
with the telemarketer business--once you give or buy something, many
telemarketers expect you to continue what you started and make it a
monthly habit--even if that was never your intent.'').
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Finally, industry commenters suggested that the Commission's
rationale for not including an exemption for ``established business
relationships'' was faulty.\645\ In adopting the original Rule, the
Commission had expressed the view that such an exemption was
inappropriate because it was not workable in the context of fraud.\646\
These commenters pointed out that the ``do-not-call'' registry was
driven by privacy concerns, not concerns about fraud. Therefore, they
argued, the Commission's stated rationale was inapplicable in the ``do-
not-call'' context.\647\ However, these commenters misunderstood the
Commission's rationale in not including an exemption for ``established
business relationship'' in the proposed ``do-not-call'' provision. In
fact, the Commission's rationale for not including such an exemption in
its proposal was driven not by concerns about fraud, but by the same
privacy concerns that those commenters noted. The Commission believed
that the national registry should contain few exemptions in order to
provide consumers with the most comprehensive privacy protection
possible.
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\645\ See, e.g., DMA-NPRM at 34-36; NCTA-NPRM at 8; Nextel-NPRM
at 13-15; Wells Fargo-NPRM at 4.
\646\ See 60 FR at 43859.
\647\ See, e.g., DMA-NPRM at 34-36; NCTA-NPRM at 8; Nextel-NPRM
at 13-15; Wells Fargo-NPRM at 4.
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Because the proposed Rule did not contain any ``established
business relationship'' exemption, it is not surprising that few
commenters raised this issue unless they were advocating that such an
exemption be added. In response to industry's strong advocacy in favor
of an ``established business relationship'' exemption, however, the
June 2002 Forum elicited comment on whether such an exemption would be
appropriate. Privacy advocates opposed any exemptions to the registry,
stating that exemptions erode the effectiveness of a ``do-not-call''
registry.\648\ These commenters feared that, because of the difficulty
in crafting such an exemption narrowly, an ``established business
relationship'' exemption would provide too great a loophole, and would
severely hamper the effectiveness of a national ``do-not-call''
registry.\649\ One consumer spoke at the June 2002 Forum about the
dangers inherent in such an exemption.\650\ AARP noted in its
supplemental comments that an exemption appeared to be necessary, but
[[Page 4634]]
urged that the Commission keep the exemption very narrow and limit it
to existing relationships only, as opposed to prior relationships.\651\
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\648\ See, e.g., EPIC-NPRM at 20-21; NCL-NPRM at 10.
\649\ NCL-NPRM at 10.
\650\ June 2002 Tr. I at 278-82 (Diana Mey).
\651\ AARP-Supp. at 3.
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Based on the record as a whole, the Commission is persuaded that
the benefits of including an exemption for established business
relationships outweigh the costs of such an exemption. Therefore, the
Commission has decided to provide an exemption for ``established
business relationships'' from the national ``do-not-call'' registry, as
long as the consumer has not asked to be placed on the seller's
company-specific ``do-not-call'' list. Once the consumer asks to be
placed on the seller's ``do-not-call'' list, the seller may not call
the consumer again regardless of whether the consumer continues to do
business with the seller. If the consumer continues to do business with
the seller after asking not to be called, the consumer cannot be deemed
to have waived his or her company-specific ``do-not-call''
request.\652\
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\652\ See June 2002 Tr. I at 278-82 (Consumer recounted that a
telemarketer from a retailer telephoned her, notwithstanding the
fact that she was on the retailer's ``do-not-call'' list. When she
questioned them about this apparent error, the telemarketer said
that she had recently made a purchase at the retailer, which re-
created an ``established business relationship,'' which exempted
them from complying with her ``do-not-call'' request.).
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The amended Rule limits the ``established business relationship''
exemption to relationships formed by the consumer's purchase, rental or
lease of goods or services from, or financial transaction with, the
seller within 18 months of the telephone call or, in the case of
inquiries or applications, to three months from the inquiry or
application. As indicated in the discussion of the definition of
``established business relationship'' in Sec. 310.2(n), this time
frame is consistent with most state laws that include a time
limit.\653\ The exemption is terminated by the consumer's request to be
placed on the company's ``do-not-call'' list, which is consistent with
the FCC's regulations and those of many of the states.\654\ As
explained above in the discussion of Sec. 310.2(n), the definition of
``established business relationship'' encompasses those affiliates of
the seller that the consumer would reasonably expect to be included
given the nature and type of goods or services offered and the identity
of the affiliate.
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\653\ See discussion of Sec. 310.2(n) and note 135, above.
\654\ See 47 CFR 64.1200(f)(