ROBERT J. SHELBY, District Judge.
This is an enforcement action against a group of telemarketers. The Federal Trade Commission alleges that Defendants Corporations for Character, L.C., Feature Films for Families, Inc., Family Films of Utah, Inc., and Forrest Sandusky Baker III engaged in deceptive business practices during multiple telemarketing campaigns. In all, there are two evidentiary motions and five motions for summary judgment before the court. Below, the court provides a brief factual background and then takes up the pending motions.
The FTC brings an enforcement action against a group of interrelated defendants.
Defendants use prerecorded audio snippets to conduct telemarketing. An employee initiates a call then plays certain snippets depending on the consumers' response. The FTC alleges that the snippets Defendants used in past campaigns contained misleading statements.
In May 2011, the FTC sued Defendants in Florida federal court, alleging that Defendants had engaged in misleading business practices. The FTC sought equitable and injunctive relief, along with civil penalties. A day after the FTC filed its Complaint in Florida, Defendant C4C sued the FTC in this court. C4C sought declaratory relief and argued that the FTC had violated C4C's First Amendment and due process rights, violated the Administrative Procedures Act, and brought the enforcement action in bad faith. In March 2012, the Honorable Judge Clark Waddoups dismissed C4C's claims. A few months later, the Florida enforcement action was transferred to this court. The two actions were then consolidated.
C4C provides telemarketing services to solicit contributions on behalf of several chapters of the Fraternal Order of Police (FOP) and the Firefighters Charitable Foundation. In exchange for its services, C4C takes a portion of the contributions. In past campaigns, C4C retained up to 70% of the proceeds from the FOP campaigns and 80% from the Firefighter Charitable Foundation campaign.
The FTC alleges that C4C made the following misrepresentations during the FOP and firefighter telemarketing campaigns:
Defendants contend that C4C did not make misleading statements during the Firefighters Charitable Foundation and FOP campaigns.
Feature Films and C4C have also conducted telemarketing campaigns to promote family-friendly films. In 2008 and 2009, C4C called consumers across the country as part of the Kids First campaign. C4C conducted the campaign on behalf of the Coalition for Quality in Children's
During the Kids First campaign, C4C telemarketers would ask call recipients to serve as volunteers. Becoming a volunteer entailed agreeing to receive two free family-friendly DVDs, watching the DVDs, and providing feedback about the movies during a second phone call. During the second phone call, C4C asked the volunteers to support the Kids First project by purchasing two additional DVDs. The FTC alleges that C4C made misrepresentations during these calls. In particular, the FTC alleges that C4C telemarketers represented that all proceeds would be used in the Kids First project when in reality up to 93% went to Defendants.
Mr. Baker produced a film named The Velveteen Rabbit. Prior to the film's release in theaters, Feature Films made approximately eight million unsolicited phone calls on Mr. Baker's behalf to promote the film. During those calls, Feature Films guaranteed some consumers that they would receive a free DVD of their choosing if they did not enjoy the film. Feature Films also told some consumers that if they purchased a ticket, they would receive a credit to buy other Feature Films DVDs.
The FTC alleges that Defendants called millions of phone numbers that were on the National Do-Not-Call Registry. In particular, the FTC alleges that C4C made two and a half million calls to registered numbers during the Velveteen Rabbit campaign, five million during the Kids First campaign, and nine million during a continuous telemarketing campaign to sell Feature Films DVDs. The FTC also alleges that Defendants made calls to people who told C4C or Feature Films representatives that they did not wish to receive further calls.
Finally, the FTC alleges that Defendants have failed to submit sufficient identifying information to caller-identification services. When Feature Films conducted the Velveteen Rabbit campaign, Defendants submitted the phrases "VELVETEEN" and "VELVETEENMOV" to be displayed on caller IDs. For calls to sell Feature Films DVDs, Defendants submitted the phrases "CUSTOMER SVC FE" and "FAMILY VALUE CB."
Defendants filed a Motion to Strike three of the FTC's exhibits submitted with its summary judgment briefing:
Defendants contend that Ms. Horne's declaration, the documents attached to the
Next, Defendants argue that the FTC's exhibits contain inadmissible hearsay. Hearsay is an out-of-court statement introduced to prove the truth of the statement.
Exhibits 8 and 9 are admissible. Whether the sample scripts are sufficient evidence for summary judgment is addressed below in the discussion on the motions for summary judgment.
Defendants further argue that the list of names submitted to caller-identification services is inadmissible because the FTC has failed to authenticate the document as required by FRE 901(a). Defendants also claim that they did not see the document until after discovery ended. The document is a self-authenticating business record under FRE 803(6) and FRE 902(11). The FTC received the document from Manchester Services, Inc., which has certified that the record was kept as part of a regularly conducted business activity. Also, the FTC produced the document and identified Manchester Services, Inc. and its agent responsible for producing the document in its initial disclosures. Exhibit 49 is admissible.
Defendants also filed a motion in limine to exclude the FTC's undisclosed analysis of phone records. But the FTC has not disclosed the analysis, leaving nothing to exclude. For this reason, along with the reasons stated on the record at the January 16, 2014 hearing, Defendants' motion is denied.
Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
The FTC's first two causes of action are for misleading representations. The first count alleges that Defendants made deceptive statements in violation of Section 5(a) of the FTC Act,
Defendants argue that the FTC's causes of action based on the FTC Act and the TSR impermissibly limit protected speech. It is well established that "[t]he First Amendment protects the right to engage in charitable solicitation."
Defendants contend that the First Amendment bars the FTC's enforcement action because it is not based on fraud. In other words, Defendants assert that the only way the FTC can restrict their charitable solicitations at issue is to prove that they committed fraud. Defendants base this argument on a line of Supreme Court cases dealing with restrictions on charitable solicitations. In Village of Schaumburg v. Citizens for a Better Environment,
After striking down the three laws, the Court once again considered limitations to charitable solicitations in Illinois ex rel. Madigan v. Telemarketing Associates.
Defendants contend that Madigan established that the FTC can restrict charitable solicitations only if they are fraudulent, meaning the FTC cannot bring claims based on the Section 5(a) reasonable-consumer standard or other standards in the TSR. The FTC, on the other hand, maintains that Madigan stands for the proposition that the government can bring enforcement actions that focus on the content of the telemarketers' representations rather than on the percentage paid toward fundraising. Thus, the FTC argues, Madigan did not limit enforcement actions to fraud, but left the door open to enforcement actions based on other causes of action as long as they focused on the content of the solicitations.
Whether the FTC asserts fraud in this action is not dispositive. Of course, an action based on fraud likely would not be amenable to a First Amendment defense. But that does not mean that the FTC's only recourse is a fraud action. Charitable solicitations, like other types of protected speech, are subject to limitations that pass constitutional muster.
Accordingly, the FTC's election not to assert fraud does not by itself warrant dismissal of the FTC's first and second causes of action. Rather, the court would to need analyze the causes of action under the applicable constitutional analysis to determine whether the First Amendment prohibits the claims. Defendants have the burden of proving their First Amendment affirmative defense.
The FTC's first cause of action is that Defendants violated Section 5(a), as well as various TSR provisions. The parties' summary judgment motions focus on the allegedly false statements made in violation of the reasonable-consumer standard. Thus, the court does not address the other allegations in the first cause of action.
The Section 5(a) reasonable-consumer standard prohibits a practice that "entails a material misrepresentation or omission that is likely to mislead consumers acting reasonably under the circumstances."
In determining whether a statement is material and likely to mislead a reasonable consumer, the court looks to the FTC's interpretation of the statute, along with other cases applying the standard. The Supreme Court has pointed out that the FTC Act "necessarily gives the Commission an influential role in interpreting § 5 and in applying it to the facts of particular cases arising out of unprecedented situations."
The next question is whether a material misrepresentation is likely to mislead a reasonable consumer. The FTC
The FTC's second cause of action alleges that Defendants violated the TSR by making false statements during telemarketing calls. The FTC alleges that Defendants violated Sections 310.3(a)(4), 310.3(d)(1), 310.3(d)(3), and 310.3(d)(4) of the TSR. Section 310.3(a)(4) prohibits "[m]aking a false or misleading statement to induce any person to pay for goods or services or to induce a charitable contribution."
Defendants contend that the FTC's claims based on the reasonable-consumer standard and the TSR fail because the statements at issue were accurate.
The FTC submits sample call scripts to prove that Defendant C4C made a number of misleading statements during the FOP and Firefighter Charitable Foundation campaigns. The parties have moved for summary judgment regarding various statements. The table below summarizes the statements that do not warrant summary judgment.
The FTC Defendants Both Parties
Bulletproof Vests: The FTC alleges Specific Percentages: Defendants Budgeting: During multiple FOP
that C4C made misrepresentations regarding contend that there is no factual support campaigns, the FTC alleges that
the purchase of bulletproof for the FTC's allegation that Defendants C4C stated during follow-up calls
vests. The sample call scripts state told consumers that "a specific that pledged contributions—as opposed
that the contributions to the Florida percentage of every contribution to contributions already paid—were
FOP would be used to provide "supplies goes to fund law enforcement training, already budgeted for charitable
like bulletproof vests" for death benefits, and assistance to purposes. The FTC alleges that
Florida officers when in fact the families of officers killed in the line of these statements were misleading
FOP did not do so. duty." The FTC submitted one of and that the organization did not actually Defendants' call scripts that stated include pledged donations in specific percentages went directly to their budget. Defendants counter by the FOPs. Further, the FTC presents presenting evidence that the charitable a call script that stated, "Okay, well in organizations maintained a budget addition to helping officers keep us based on the anticipated contributions. safe 27% of the gross revenues from donations go to the charitable organization for things like providing funding for law enforcement training, as well as death benefits and ongoing assistance for the families of Connecticut police officers killed in the line of duty." Amount Retained by C4C: The FTCLaw-Enforcement Training: The contends that C4C misrepresented to FTC contends that C4C made misrepresentations consumers the amount of their contribution when it told consumers that would be used for charitable that contributions would be used to activities. Specifically, C4C's pay for law-enforcement training. scripts stated that "any support you The FTC argues that those representations can give goes" to charitable programs. were misleading because the The FTC contends that these statements contributions were not used to train were misleading because they police officers on daily failed to mention that C4C retained a law-enforcement activities. significant amount of the contributions.Administrative Costs: The FTC alleges that C4C misrepresented the amount of contributions that would be used for administrative costs. C4C's scripts state that such costs would be "very minimal." The FTC argues that these statements were misleading because, in reality, C4C retained a majority of contributions.Percentage Doubled: The FTC contends that C4C made misleading representations concerning the percentage of donations retained by the FOPs and the Firefighters Charitable Foundation. Also, the FTC claims that Defendants made misleading representations by stating that the percentage of contributions retained by the FOPs and the Firefighters Charitable Foundation had doubled.
To prove liability, the FTC must show that Defendants made material misrepresentations.
Defendants have continuously maintained—in document productions, declarations, motions, and at oral argument—that the sample scripts are not accurate representations of actual conversations. The telemarketers conducting the campaigns at issue use keyboard commands to play various snippets. Although the produced written scripts may reflect some of the snippets the telemarketers could play, they do not prove that Defendants actually made the statements to consumers. Further, the snippets do not provide context to conversations between telemarketers and consumers. The FTC is not required to prove that individual consumers relied on Defendants' statements. But it must prove that Defendants made the statements to consumers.
To find the FTC's proffered evidence sufficient, the court would have to infer that Defendants made the statements based on the fact that the statements are in the sample call scripts. Yet Defendants assert that the sample scripts do not reflect actual conversations but rather a possibility of snippets that telemarketers could have used.
On the other hand, to grant summary judgment in favor of Defendants for the statements regarding budgeting and law-enforcement training, Defendants must show that they did not make the statements or that the statements were true. By moving for summary judgment on some of the statements, Defendants assume the burden. And although the FTC has not shown that Defendants made the calls, Defendants have not shown that they did not make the calls. As stated, the sample scripts create a factual dispute as to whether Defendants made the statements to consumers as part of the telemarketing campaigns. While the fact dispute works in favor of Defendants as opponents of the FTC's summary judgment motions, it works against them as proponents of their own motions. What's more, the FTC presents evidence that the statements were false, leaving a factual dispute regarding the statement's accuracy.
There is a genuine dispute as to whether Defendants actually made the statements. And the court cannot engage in factual inquiries reserved for the jury. Summary judgment is inappropriate for the statements listed above.
Defendants assert that the statements below are not misrepresentations. Unlike the statements above, the dispute is not whether Defendants actually made the statements. Rather, the dispute is whether the statements are true. Even if Defendants made the statements, they would not be liable if the statements were true.
Defendant C4C's sample scripts related to the Firefighters Charitable Foundation campaigns stated that pledged contributions—as opposed to contributions actually paid—were already budgeted for charitable purposes. The FTC alleges that these statements were misleading and that the Foundation did not actually include pledged donations in its budget. Defendants counter by presenting evidence that the charitable organizations maintained a budget based on the anticipated contributions.
The Foundation's representative testified in a deposition that the Foundation considers the pledges when planning how to pay for various projects. The FTC does not put forward any specific evidence to rebut this. Based on the evidence submitted,
The FTC alleges that Defendants misled potential donors by stating that if the potential donor paid over the telephone with a credit card, more of the contribution would go directly to the charitable organization instead of to administrative costs to send out pledge sheets. Defendants argue that they would have incurred additional administrative costs if required to spend the time and expense of mailing the actual pledge sheets. The FTC does not put forth any further evidence that these statements were false. The court thus grants summary judgment in favor of Defendants on these statements.
Defendants argue that there is no evidence that consumers were deceived or actually suffered harm. But "[n]either proof of consumer reliance nor consumer injury is necessary to establish a § 5 violation."
The FTC contends that Defendants made false statements during the Kids First telemarketing campaign. Feature Films made calls on behalf of the Coalition for Quality in Children's Media, which ran the Kids First program. During the campaign, telemarketers would call potential donors and ask them if they would be willing to volunteer in helping the organization make a recommended viewing list of family-friendly movies. If the potential donors agreed to volunteer, they would receive two DVDs for free, watch the DVDs, and provide feedback in a follow-up call. During the follow-up call, Feature Films would offer for sale additional DVDs and state that "all proceeds of this fundraiser will help us finish creating this recommended viewing list." Pursuant to the agreement between Feature Films and Coalition for Quality, Defendant Feature Films would receive up to 93% of the fundraising proceeds. Unlike the FOP and Firefighter Charitable Organization campaigns, the FTC submitted evidence that Defendants made the statements at issue.
It is well established that the amount of fundraising proceeds retained by the fundraiser does not bear on Section 5(a) or TSR liability. The FTC, however, has alleged that the content of Defendants' telemarketing messages was deceptive. The FTC does not contend that the percentage
It is unclear whether a reasonable consumer would interpret the word "proceeds" as meaning the net or gross amount of contributions. And the court declines to substitute its own analysis for the jury's on a fact issue. The court declines to grant summary judgment regarding Defendants' statements during the Kids First campaign.
In 2003, the FTC established the National Do-Not-Call Registry. Individuals have the option of placing their telephone numbers on the registry. Section 310.4 of the TSR prohibits telemarketers from calling those registered numbers. Nearly 200 million telephone numbers are on the registry. Telemarketing companies must screen their calls to ensure they do not make outbound calls to registered numbers. Defendants have downloaded the registry since 2003. The FTC alleges that Defendants made calls to phone numbers on the registry in both the Kids First and Velveteen Rabbit campaigns.
It is undisputed that Defendants called numbers on the Do-Not-Call Registry during the Kids First Campaign. Defendants argue that the phone calls were exempt from the TSR rules governing the Do-Not-Call Registry.
Defendants' initial call to consumers did not solicit sales, but rather sought volunteers to view and provide feedback on family-friendly films. But during the second call, which invariably came if the consumer agreed to volunteer, Defendants sought sales of additional DVDs. The combination of the first and second call constitutes a "plan, program, or campaign" that seeks to induce sales. Therefore, the first and second calls of the Kids First campaign are governed by Section 310.4(b)(1)(iii)(B).
Defendants contend that the calls were exempt from the regulation under Section 310.6(a) of the TSR. Section 310.6(a) exempts from Section 310.4(b)(1)(iii)(B) "[s]olicitations to induce charitable contributions via outbound telephone calls."
The issue is whether soliciting volunteers and then offering DVDs in exchange for money constitutes "solicitations to induce charitable contributions" under the TSR. Section 310.2(f) defines charitable contribution as "any donation or gift of money or any other thing of value."
The first call of the Kids First campaign did not create an established business relationship. Rather, it solicited volunteers to watch and review films. By the second call, the potential donor had not purchased, rented, or leased goods from Defendants. Further, the potential donor had not made an inquiry regarding Defendants' business. Quite the opposite, Defendants had reached out to the potential donor in the first instance. The established-business-relationship
Thus, the question becomes whether Defendants had actual or implied knowledge of the violation. The FTC points the court to evidence that Defendants were aware of the law—they downloaded the registry and implemented a policy to prevent making calls to numbers in the registry. Defendants argue that their awareness of the registry and their policy proves that they made a good-faith effort to comply with the law. Also, Defendants argue in various parts of their briefing that the Kids First campaign was not subject to the TSR regulations. In the end, the issue of whether Defendants had actual or implied knowledge that their calls during the Kids First campaign violated the FTC Act and the TSR is disputed. The court reserves for trial the issue of whether the FTC may obtain civil penalties.
The Velveteen Rabbit campaign involved cold calls to the general public. Defendants called phone numbers in the areas where the film was being released, including numbers on the Do-Not-Call Registry. The scripts for these calls promoted the film and induced consumers to purchase tickets. Some calls stated that consumers who attended the movie would receive credit to purchase additional DVDs. Other calls stated that the producers would give consumers a free DVD if they did not enjoy the movie. Defendants contend that the phone calls were informational rather
Under Section 310.4(b)(1)(iii)(A) of the TSR, a telemarketer engaged in charitable solicitation on behalf of a nonprofit must maintain a list of individuals who state that they do not wish to receive calls "made on behalf of the charitable organization for which a charitable contribution is being solicited."
The FTC has submitted evidence, including a number of consumer complaints, that shows C4C called numbers during the Kids First campaign after consumers asked to be placed on the do-not-call list. Defendants argue that the calls fall under the safe-harbor affirmative defense.
Under Section 310.4(b)(3) of the TSR, a telemarketing company is not liable for violating Section 310.4(b)(1)(iii) if it can demonstrate that it (1) has established and implemented written procedures to comply with the do-not-call regulations; (2) trained its personnel in these procedures; (3) maintains an entity-specific internal do-not-call list; (4) uses a process to prevent telemarketing to numbers on this list; (5) monitors and enforces compliance with the procedures; and (6) proves any subsequent call otherwise violating Section 310.4(b)(1)(iii) is a result of error.
Defendants put forth evidence that they maintain an internal do-not-call list and train their employees about placing phone numbers on the list and avoiding future calls to the listed numbers. Yet, the FTC puts forth evidence that Defendants made thousands of calls to listed numbers during the Kids First and Velveteen Rabbit campaigns. The conflicting evidence makes it unclear whether Defendants properly trained telemarketers and whether the calls were a result of error. On the one hand, evidence of Defendants' procedures and training indicates that any calls to
The FTC also alleges that Feature Films violated Section 310.4(b)(1)(iii)(A) during the Velveteen Rabbit campaign. Defendants once again argue that the Velveteen Rabbit calls were advocacy calls and not subject to the TSR. As stated above, that argument fails. Next, Defendants contend that Feature Films' internal do-not-call list did not apply to the Velveteen Rabbit campaign because that campaign was on behalf of the producers.
Defendants' argument is well taken. Under Section 310.4(b)(1)(iii) of the TSR, a company violates the internal do-not-call rules by initiating an outbound call to "a person [who] previously has stated that he or she does not wish to receive an out-bound telephone call made by or on behalf of the seller whose goods or services are being offered or made on behalf of the charitable organization for which a charitable contribution is being solicited."
The inquiry does not end there, however. The FTC has submitted individual consumer complaints that Defendants called consumers who had requested that their numbers be placed on the Velveteen Rabbit internal do-not-call list. Like the Kids First campaign, Defendants argue that they are protected under the TSR's safe harbor for any calls to numbers on the internal do-not-call list. For the reasons stated above, the court concludes that there is a factual dispute regarding Defendants' safe-harbor defense and the issue is reserved for trial.
The FTC alleges that Defendants violated Section 310.4(8) of the TSR by failing to transmit its seller name to caller-identification services. Telemarketers violate the rule by "[f]ailing 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."
Section 310.4(d) of the TSR lays out required oral disclosures that telemarketers must make. The rule states, "It is an abusive telemarketing act or practice and a violation of this Rule for a telemarketer in an outbound telephone call or internal or external upsell to induce the purchase of goods or services to fail to disclose truthfully, promptly, and in a clear and conspicuous manner to the person receiving the call, the following information: (1) The identity of the seller; (2) That the purpose of the call is to sell goods or services; (3) The nature of the goods or services. . . ."
The FTC argues that Defendants violated the oral-disclosure rule during the Kids First campaign by stating that Kids First was calling instead of the Coalition for Quality Children's Media. Defendants respond by arguing that the disclosure was sufficient because Kids First is a registered trade name of the Coalition for Quality. But the FTC points out that Kids First is not a trade name, but a certification mark of the Coalition for Quality. Kids First is a mark that signifies the Coalition for Quality's approval. Because Defendants failed to disclose the seller's name, the court grants summary judgment for the FTC.
The FTC further alleges that Defendants violated the oral-disclosure rule during the Velveteen Rabbit campaign by failing to disclose the seller's identity and instead stating that they were "calling on behalf of the producers." Although Defendants stated that they were calling on the producers' behalf, they did not disclose the producers' identities. The oral-disclosure rule requires telemarketers to state the "identity of the seller." The rule allows consumers to judge whether to listen to the message and purchase the product and also gives consumers information so they can contact the seller to prevent future calls. Merely stating that the call is on behalf of the producers of The Velveteen Rabbit does not give the consumer important information. And although the statement discloses the seller's position, it does not disclose his identity. For example, a telemarketing campaign selling sponges would need to do more than state that the call was on behalf of the sponge retailer. Because Defendants have failed to identify the seller, the court grants summary judgment in the FTC's favor.
Lastly, the FTC moves for summary judgment on its abandoned-calls claims.
The rule provides a safe harbor if a telemarketing company employs a technology that ensures that no more than 3% of answered calls are abandoned over each successive thirty-day period of the calling campaign. The telemarketer must also play a recorded message when a sales representative is not available, stating the name and telephone number of the seller. Lastly, the telemarketer must maintain records that establish compliance with the safe-harbor requirements.
The FTC submits evidence of daily reports that Defendants generated when abandoned call rates exceeded 6%. Defendants counter by arguing that the daily reports did not track abandoned calls for the entire campaigns but rather for a subcategory of campaigns. Defendants and the FTC also submitted multiple statements from Mr. Baker that the abandoned call rate was consistently under 2%. In short, the facts are in dispute. Because the issue of whether the abandoned call rate exceeded 3% is essential to proving or disproving the safe-harbor affirmative defense, the court declines to grant summary judgment and reserves the issue for trial.
For the reasons stated, the court GRANTS IN PART AND DENIES IN PART Defendants' Motion for Partial Summary Judgment on Counts 1 and 2 (Dkt. 38) and the FTC's Motion for Partial Summary Judgment on Liability Regarding the Kids First and Velveteen Rabbit Campaigns (Dkt. 98). The court DENIES the FTC's Motion for Partial Summary Judgment on Counts 1 and 2 (Dkt. 89), Defendants' Motion for Partial Summary Judgment on Counts 3 and 4 (Dkt. 39), Defendants' Motion for Partial Summary Judgment on Count 5 (Dkt. 41), Defendants' Motion in Limine (Dkt. 37), and Defendants' Motion to Strike (Dkt. 80). Summary judgment is granted on the following issues:
The remaining issues, including injunctive relief and civil penalties, are reserved for trial.
