Chairman of U.S. Senate Committee Releases Findings and Remarks on Cramming Investigation

U.S. Senate Committee on Commerce, Science & Transportation
Press Releases - July 12 & 13, 2011

Yearlong Investigation:

• In May 2010, John D. (Jay) Rockefeller, Chairman of the Senate Committee on Commerce, Science & Transportation (the "Senate Committee"), initiated an investigation into third-party billing on landline telephone bills.
• This July, the Senate Committee released the findings, which revealed a rampant practice of "cramming" - the placing of unauthorized fees on consumers' landline telephone bills.
• According to the investigation, cramming is costing United States consumers approximately $2 billion a year.
• Rockefeller maintains that the industry's promise to self-regulate third-party billing has not been effective in putting an end to cramming.
• Further, according to Rockefeller, the telephone companies' anti-cramming safeguards have mostly failed.
• It appears that not only are the third-party billers turning a profit, but the telephone companies are as well

Rockefeller's Remarks:

• The Senate Committee held a hearing on July 13th to discuss cramming.
• While the industry implemented voluntary guidelines more than a decade ago, the business of cramming continues to cost consumers "tens of millions of dollars in bogus charges . . . ."
• The Senate Committee remarked that telephone companies have not done enough to combat this practice, noting that they make money on each transaction.
• Rockefeller complained that self-regulation and case-by-case enforcement have not been enough to halt cramming.
• He promised that Congress will take a new look at the problem and will find a way to stop the practice.

Take Away:

• With three (3) articles in this issue of our Newsletter alone, it is clear that cramming is a primary concern among regulators today.
• The Federal Trade Commission and Federal Communications Commission are both working with the Senate Committee, filing lawsuits and imposing penalties for alleged cramming violations.

FCC Proposes $11.7 Million in Penalties for Alleged "Cramming"

Issues Enforcement Advisory

Federal Communications Commission
Press Release - June 16, 2011

Cramming Activity:

• The Federal Communications Commission (the "FCC") proposed substantial penalties against four (4) companies for alleged "cramming" practices, that is, placing unauthorized charges on consumers' telephone bills.
• These unauthorized charges, ranging from $1.99 to $19.99 per month, were for services that consumers allegedly did not want, order or use.
• According to the FCC, these charges were often nestled within multi-page telephone bills with misleading entries designed to go undetected by consumers.
• The FCC depicts cramming as an "unjust and unreasonable" business practice in violation of Section 201(b) of the Federal Communications Act.
• The four (4) companies involved in the enforcement action are Main Street Telephone, VoiceNet Telephone, Cheap2Dial Telephone and Norristown Telephone.
• The FCC issued Notices of Apparent Liability to each company for "apparently charging thousands of customers for 'dial-around' long distance service that they had not ordered."

FCC Enforcement Advisory:

• The Enforcement Advisory outlines what cramming is, the rules that prohibit it, how consumers can avoid being crammed, and how businesses can comply with the law.
• The Enforcement Advisory serves to remind companies of the FCC's willingness to impose severe penalties against companies that engage in cramming activities.
• The FCC also encourages consumers to pay close attention to the charges placed on their monthly telephone bills and to report any unauthorized charges.
• The Enforcement Advisory refers to the FCC's Truth-in-Billing Rules, requiring billing companies to use clear, non-misleading, plain language in describing services for which a consumer is charged.

Take Away:

• In the FCC investigations of the four (4) companies mentioned above, the FCC found the cramming violations to be particularly "egregious" due to the number of consumers affected and because it seemed as if the companies either knew or reasonably should have known that the consumers did not request, authorize or use the services.
• The FCC arrived at this determination based on the large number of consumer inquiries and complaints that each of the companies received.

FCC Proposes Rules to Prevent Cramming;
Seeks Comment

Federal Communications Commission
Press Release - July 12, 2011

Proposed Rules:

• The Federal Communications Commission (the "FCC") has proposed rules designed to stop "cramming" – the placement of unauthorized third-party charges on telephone bills.
• The proposed rules contain a fairly detailed notice provision.
• Specifically, landline telephone companies would be required to notify subscribers clearly and conspicuously, at the point of sale, on each bill and on their websites, of the option to block third-party charges from appearing on their telephone bills.
• The rules would also strengthen the FCC's requirement that third-party charges be separated on bills from the telephone company's charges.
• Further, both landline telephone companies and Commercial Mobile Radio Service ("CMRS") providers would need to incorporate on all bills and on their websites, a notice that consumers may file complaints with the FCC.

FCC Seeks Comment:

• The Notice of Proposed Rulemaking (the "Notice") seeks comment on whether landline telephone companies should be:
  1. required to offer subscribers the option to block third-party charges from appearing on their telephone bills;
  2. required to notify consumers that they do not offer blocking service, if that is the case;
  3. prohibited from assessing an additional fee for blocking services; and/or
  4. prohibited from including third-party charges on telephone bills altogether.
• The Notice also solicits comments on whether landline telephone companies and/or CMRS providers should be required to:
  
  1. provide accurate contact information for third-party vendors on their telephone bills; and/or
  2. screen third parties for prior rule violations or other violations of law before agreeing to place their charges on consumers' telephone bills.

Take Away:

• It is clear from the FCC's recent imposition of substantial penalties against companies that have engaged in cramming activities, as well as the issuance of its Enforcement Advisory (both reported above), that cramming will be closely monitored by the FCC.
• These proposed rules further strengthen the FCC's efforts to assist consumers in preventing unauthorized telephone charges.

Consumer Credit Reporting Agency to Pay $1.8 Million for Violating Fair Credit Reporting Act

U.S. v. Teletrack, Inc., Civ. No. 1-11 CV-2060
Federal Trade Commission
Press Release – June 27, 2011

FTC Complaint:

• Teletrack is a consumer-reporting agency that gathers information on consumers for the purpose of furnishing reports to third parties.
• According to the complaint, Teletrack sells these reports to businesses that serve "non-traditional" credit consumers, such as payday lenders, rental purchase stores and non-prime auto lenders.
• Companies seeking a credit report on a consumer will provide Teletrack with his/her personal information.
• The complaint alleges that Teletrack adds the consumer's name, address, telephone number and other identifying information, as well as the fact that there has been a credit inquiry, into a marketing database that it maintains.
• The Federal Trade Commission (the "FTC") claims that Teletrack then sells the lists of consumer names and addresses on whom there has been a credit inquiry by one of Teletrack's clients.
• For example, the FTC alleged that Teletrack sold lists of consumers who previously sought payday loans to third parties that wanted to use this information to target potential customers.
• According to the FTC, selling credit reports for marketing purposes is not permissible under the Fair Credit Reporting Act (the "FCRA").

Settlement Order:

• Teletrack agreed to pay $1.8 million to settle the FTC charges.
• The company is also required to furnish credit reports only to those entities that it reasonably believes has a permissible purpose to receive them under the FCRA.
• The settlement order also includes reporting and record-keeping requirements to ensure Teletrack's ongoing compliance with the order.

Take Away:

• By way of this action, the FTC continues in its effort to protect consumers' privacy by ensuring that their sensitive credit report information is not sold for marketing purposes

Online Forum's Failure to Act to Prevent Future Infringement After Receipt of DMCA "Takedown Notices" Could Lead to Secondary Liability

Flava Works Inc. v. Gunter, No. 10-6517, 2011 U.S. Dist. LEXIS 50067
(N.D. Ill. May 10, 2011)

Facts:

• Plaintiff Flava Works, Inc. produces and distributes adult entertainment products, including DVDs, streaming video, magazines, photographs and Internet website content.
• Defendant Marques Rondale Gunter created, owns and operates a website located at myVidster.com.
• According to the complaint, myVidster.com is a social networking website through which members can store and "bookmark" video files and post links to third-party websites.
• Plaintiff alleges that, without permission, members of myVidster.com have uploaded plaintiff's copyrighted videos and images or links to those videos to myVidster.com.
• Further, plaintiff claims that by encouraging users to share and view videos, defendant "purposefully created a system that makes it more difficult for copyright owners to monitor the site for infringement."
• Plaintiff sent defendant (and his web-hosting companies) numerous "takedown notices" under the Digital Millennium Copyright Act (the "DMCA").
• After the DMCA notices were sent, plaintiff alleged that the website was continually updated with infringing material and that Gunter took no action to prevent future infringement.
• Defendant moved to dismiss the complaint.

DMCA Section 512:

• The DCMA affords online fora "safe harbor" protections for infringing content that is uploaded to their websites by third parties.
• This safe harbor protection is qualified: an online forum with actual knowledge of infringing material on its system or network is required to take active steps to remove that material.

Court Decision:

• The court ruled that defendant could not be directly liable for copyright infringement because there were no allegations that it caused copies of plaintiff's copyrighted works to be made.
• However, the court found that plaintiff did state a claim for contributory copyright infringement because it "alleges not just receipt of the DMCA notices but also that after having received the notices defendant failed to act to prevent future similar infringing conduct . . . ."
• The issue for the court was whether the plaintiff alleged facts that would support a reasonable inference that defendant actually or constructively knew of copyright infringement occurring on myVidster.com.
• The court found that plaintiff satisfied this element by alleging that it had sent seven (7) notices over a seven-month period to defendant.

Take Away:

• While the DMCA safe harbor protections are a comfort to online fora, it is clear from this decision that they are not automatic.
• The court found that the repeated takedown notices shifted responsibility to defendant to take action to avoid future infringement.

FTC Charges CEO of Promissory Note Program with Misleading Claims,
Use of False Testimonials

Federal Trade Commission v. Dalbey, D. Col.
FTC File No. 092 3062
May 26, 2011

FTC Complaint:

• The Federal Trade Commission (the "FTC") charged Russell Dalbey, CEO and founder of the company promoting the program, "Winning in the Cash Flow Business," with defrauding consumers with false claims that they could earn a great deal of money "quickly and easily by finding, brokering, and earning commissions on seller-financed promissory notes."
• The complaint alleged that consumers spent between $40 and $160 initially on the program, but were later encouraged to spend hundreds or thousands more for products or services, such as seminars, coaching sessions and promissory note-holder lead lists.
• The marketing campaign for this "wealth building" program included infomercials and pitches on the Internet and via direct mail.
• The message was that consumers could successfully earn substantial income brokering promissory notes in three (3) easy steps: "Find 'Em," "List 'Em," and "Make Money."
• According to the complaint, very few people made the money promised by Dalbey.

Use of "Testimonials":

• The infomercials were allegedly supported by testimonials from consumers who claimed to have made great sums of money using the program in short time frames.
• The FTC alleged that the typical consumer experience was not consistent with those depicted in the testimonials.
• According to the complaint, some testimonials stated earnings that were total earnings figures accumulated over several years rather than in a one-year time frame.

Violation of FTC Act:

• The complaint charges that Dalbey violated the FTC Act and Colorado law by making false and unsubstantiated claims that consumers are likely to quickly and easily find, list and broker promissory notes and earn substantial amounts of money, and that purchasing the additional products and services will meaningfully increase the likelihood that consumers will succeed in the promissory note business.

FTC Settles with Consumer:

• The FTC and Colorado Attorney General settled charges against Marsha Kellogg, one of the consumers who provided a testimonial that was used in an infomercial.
• She falsely claimed that she had earned $79,975.01 from one (1) promissory note transaction using Dalbey's program, and that her total earnings were more than $134,000.
• According to the complaint, she earned $50,000 less than what she had claimed.
• Kellogg is prohibited from making misrepresentations in the future and she has agreed to cooperate with law enforcement in its ongoing case against Dalbey.

Take Away:

• Companies that are in the business of selling programs designed to help people make money must accurately portray how much consumers can expect to make.
• What sets this proceeding apart from others, is that the FTC is now going after individuals who mislead consumers into participating in "get rich quick" schemes -- and not only the companies that offer them.

Second Circuit Reverses, Holding Copyright Law Preempts "Hot News" Misappropriation Claim

Barclays Capital Inc. v. The Flyonthewall.com, Inc.
No. 10-1372-CV, 2011 U.S. App. LEXIS 12421 (2d Cir. June 20, 2011)

Facts:

• Plaintiff firms Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Inc. and Morgan Stanley & Co. Inc. conduct and ultimately provide equity research recommendations to their clients.
• It is intended that plaintiffs’ clients will trade on these recommendations.
• Defendant Theflyonthewall.com, an Internet subscription news service, aggregates and publishes research analysts’ stock recommendations along with other financial news items.
• Plaintiffs contended that their recommendations are “hot news” under the meaning of the law, and that defendant’s “regular, systematic, and timely taking and redistribution” of this information constitutes misappropriation under New York’s unfair competition law.
• After sending cease-and-desist letters to defendant without success, plaintiffs sued for misappropriation and copyright infringement.
• Defendant did not dispute that it had engaged in copyright infringement. 
• It did, however, contest that it is liable for “hot news” misappropriation.

District Court:

• The court held that defendant was guilty of "hot news" misappropriation by collecting and disseminating to its own subscribers the summary recommendations contained in the plaintiffs' reports.
• The court noted that "hot news" is protectable as "quasi-property," citing the U.S. Supreme Court decision in International News Serv. v. Associated Press, 248 U.S. 215 (1918).
• According to that decision, "the misappropriation doctrine was developed to protect costly efforts to gather commercially valuable, time-sensitive information that would otherwise be unprotected by law."
• The court also applied the five-part test identified in the Second Circuit decision, National Basketball Ass'n v. Motorola, Inc.,105 F.3d 841 (1997), to determine whether plaintiffs' "hot news" cause of action would survive preemption under the Copyright Act.
• For a thorough summary of the lower court's finding, please see our July 2010 Newsletter.

Defendant's Appeal:

• Flyonthewall.com argued that:
  1. the court erred in finding that the plaintiffs had established "hot news" misappropriation under New York Law, specifically in that the plaintiffs failed to prove time-sensitivity, free-riding, direct competition and reduced incentives;
  2. the court's injunction violates its free-speech rights;
  3. the court's finding of "hot news" misappropriation violates copyright law;
  4. the court failed to apply the proper standard in granting injunctive relief; and
  5. the injunction is unreasonably overbroad.

Second Circuit:

• The Second Circuit court of appeals reversed the lower court's decision, finding that plaintiffs' "hot news" misappropriation claim is preempted by federal copyright law.
• In so holding, the Second Circuit reviewed the preemption criteria under the Copyright Act. 
• The court pointed out an important principle behind the preemption doctrine:  the value of providing for "legal uniformity" where Congress has acted nationally.
• That is, if "hot news" misappropriation claims are not preempted, it is possible that such actions may have different results in different states.
• The court also noted that under the NBA decision, defendant is not "free-riding."  Instead, the court stated, "[i]t is collecting, collating and disseminating factual information – the facts that Firms and others in the securities business have made recommendations with respect to the value of and the wisdom of purchasing or selling securities – and attributing the information to its source."
• Significantly, the court pointed out that the "Firms" are making the news and defendant is breaking it. 

Take Away:

• This is a big win for media companies.  The court shot down the "hot news" misappropriation tort cause of action in favor of respecting the federal copyright laws.
• The court concluded the decision by holding, "a Firm's ability to make news – by issuing a Recommendation that is likely to affect the market price of a security – does not give rise to a right for it to control who breaks that news and how."