Court Takes Webcrammers to Task for Deceiving Consumers

At the request of the Federal Trade Commission, the District Court for the Southern District of New York has permanently banned a group of Miami-based defendants from making misrepresentations when selling Internet Service Provider (ISP) services to consumers in the future – via telemarketing or any other means.

In 2003, the FTC charged the defendants with defrauding consumers they called to sell services such as Internet access and Web site design. The court order announced today also prohibits the defendants from billing consumers without first obtaining their consent – which they must record – and provides strict rules they must follow to ensure that consumers the defendants call are protected from fraud and deception. Finally, the order establishes a program through which defrauded consumers can obtain refunds from the defendants.

The court order announced today settles the Commission charges against: Epixtar Corp.; Liberty Online Services, Inc.; National Online Services, Inc.; B2B Advantage, Inc., formerly known as SBA Online; and William Douglas Rhodes, President of Epixtar, Liberty, National, and SBA Online.

The Commission’s Complaint: In its original complaint, filed in 2003, the FTC alleged that since December 2001, the defendants telemarketed Internet services to small businesses and non-profit organizations such as churches or community service organizations nationwide. The defendants typically claimed they were calling from an actual business telephone directory and that they simply were calling to update the consumer’s business information, leading consumers to believe they had a pre-existing relationship with the defendants. In their sales pitch, the defendants claimed consumers could try SBA Online’s services free for 30 days, with no obligation to pay, and told consumers they could cancel the free services at any time. The defendants also allegedly imposed the 30-day trial on consumers without allowing them to refuse the offer.

The Commission further alleged that the defendants violated the FTC Act by failing to disclose adequately: 1) that consumers must cancel SBA Online’s Internet services before the end of the free trial period, or their business automatically would be billed $29.95 plus tax each month on their telephone bill; 2) the prescribed manner in which the consumer must cancel the trial service, and other specific steps the consumer must take to avoid the charges; 3) the inception and expiration dates of the trial service; and 4) the date the defendants would submit the charges for payment.

The complaint charged that SBA Online unfairly billed consumers without their express informed consent, in violation of the FTC Act and that the defendants charged some consumers who said they were not interested in the service and ended the sales call. In other instances, the defendants allegedly asked consumers to review a packet of written information and then contact them if they were interested in the offer. When consumers agreed simply to review the information, the defendants allegedly never sent it, but began billing consumers anyway. Finally, according to the FTC, consumers often had trouble contacting the defendants to cancel the services and obtain a refund and that in many cases the defendants agreed to cancel the services but refused to refund consumers’ money or agreed only to provide partial refunds.

Terms of the Final Order: The final order filed with the court prohibits the defendants from engaging in the deceptive practices alleged in the Commission’s complaint. Specifically, it bars them from making misrepresentations in the sale of ISP services, whether they are offered via telemarketing or any other means. It details specific disclosures the defendants must make to consumers during sales pitches, including who they are, that the call is a sales call, and what they are selling. It also bars the defendants from misrepresenting anything about the sales offer, including negative-option features and cancellation terms.

The order next prohibits the defendants from billing consumers, or receiving money from them, without their express informed consent, and requires them to record the consumers’ consent to be billed during the sales pitch. The defendants also are barred from selling or otherwise transferring their customer lists to anyone else.

Next, the order provides for continued consumer redress in the same way it has occurred since the court entered the preliminary injunction against the defendants. Under the redress program, consumers are eligible to receive a refund or credit directly from the defendants, from their local telephone carrier, or from the billing company. The order also provides for the use of an impartial “Referee” in cases where there is a conflict between what the consumers and the defendants claim is owed as a refund.

Finally, the order contains a clause that would allow the FTC to reopen the case if defendant William Douglas Rhodes – the companies’ principal – is found to have misrepresented his financial condition. In such a case, he would be immediately subject to a $33 million court judgement. The order also contains monitoring and record keeping terms to ensure the defendants’ compliance.

Consumer Hotline: The FTC will continue to operate a hotline (202-326-2998) to assist the victims of the web cramming engaged in by the defendants. The FTC’s hotline will advise consumers on what steps to take if they receive a notice from the defendants and what consumers should do to obtain a refund.

Case History: In October 2003, the court entered a temporary restraining order against the defendants, stopping their allegedly illegal conduct. A temporary receiver subsequently took control of the defendants’ assets, and the court entered a preliminary injunction against the defendants on November 21, 2003, prohibiting the unfair and deceptive practices that led to the FTC’s complaint and imposing monitoring and compliance requirements. In the time since, the FTC has worked with the defendants to help defrauded consumers cancel orders for the defendants’ services and obtain refunds. To date, the defendants – who are in bankruptcy – have issued more than $3.6 million in refunds and credits to consumers who have cancelled their services.

The Commission vote approving the issuance of the stipulated final order was 5-0. The order was filed in the U.S. District Court for the Southern District of New York on November 20, 2006. The FTC received assistance in its investigation of this case from the U.S. Small Business Administration, the Better Business Bureau Serving Southeast Florida, the Florida and Missouri Offices of Attorney General, and Verizon and SBC.

NOTE: Stipulated final judgments are for settlement purposes only and do not constitute an admission by the defendants of a law violation. Stipulated judgments have the force of law when signed by the judge.

Copies of the consent order in settlement of the court action are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov/ftc/complaint.htm. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC File No. X040008; Civ. No. 03-CV-8511 (DAB))