FTC Action Against Three Companies Highlights 800/900 Number Billing Fraud

In its first action attacking the practice of "cramming" -- charging consumers on their actual phone bills or on look-alike bills for services they have not purchased -- the FTC today announced the filing of a complaint against three Los Angeles-based corporations and four individual officers of those corporations. The defendants in this action are Interactive Audiotext Services, Inc. (IAS); American Billing & Collection, doing business as ABC Services; U.S. Interstate Distributing, Inc. (USID); and four corporate officers.

Increasingly, the telephone is being used to deliver and charge for services other than those provided by traditional local or long distance telephone carriers, said the FTC. Included among these non-traditional services are telephone-based audio information or entertainment programs such as horoscopes, sports information, and "adult" chat lines -- known in the telecommunications industry as "audiotext" services. Growing use of the telephone to deliver and charge for these and other non-traditional services also has led to an increase in consumer complaints about unfair and deceptive billing practices, the agency said.

"In the information age, consumers increasingly rely on the telephone, not just for communication, but as a medium of electronic commerce," Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection, said. "The Commission's case today sends a strong message to those who would use the telephone and telephone billing to victimize consumers."

The agency's complaint alleges that, in many instances, the defendants bill the owner of the telephone line used to purchase defendants' audiotext services, rather than the person who actually purchased the services. According to the complaint, when consumers call the defendants' 800 numbers, they hear a recorded message offering them an opportunity to purchase audiotext services by either having the charges for the services billed to their credit or debit card account, having their checking account debited, or having the company bill them directly. The defendants use Automatic Number Identification (ANI), a system much like the "Caller ID" service, to identify the telephone number from which a call for the purchase of their services is placed. With this information, they can identify the name and address of the person who owns that telephone number. However, ANI can identify only the person who owns the telephone line, not the person placing a call to obtain services. The FTC alleges that, in numerous instances, the party billed for defendants' audiotext services is not the caller who purchased and received the audiotext services. Instead, the owner of the telephone line (the line subscriber) is billed. According to the FTC's complaint, as a practical matter, consumers cannot block access to 800 numbers from their telephone lines, and, therefore, they cannot reasonably avoid charges for purchases of defendants' services by someone else using their telephones.

In addition, in some instances, when callers dial an 800 or 900 number they hear a recording directing them to call either a telephone number that begins with "011" or a "500" number. According to the complaint, these solicitations do not disclose that by dialing these numbers, the caller is accessing defendants' audiotext services through an international long distance call that often costs more than $4 per minute.

The complaint also alleges that the companies violate the FTC's 900-Number Rule, which prohibits charging for audiotext services accessed through a call to an 800 number unless the caller, in advance of calling for the services, has entered into a valid presubscription contract with the company. The complaint charges that the defendants further violate the 900-Number Rule by connecting callers directly to live adult chat lines without providing the required preamble disclosures detailing the cost of the services, explaining that the caller can avoid incurring charges by hanging up within three seconds of an audible signal, and warning that anyone under the age of 18 must have a parent's permission to complete the call.

In addition to the companies, the complaint names as defendants Frank Montelione, Russel Leventhal, Stuart Leventhal, and John O. Cooper. Montelione is the secretary, chief financial officer and a director of IAS and also serves as the chief financial officer and a director of USID and a vice president of ABC. Russel Leventhal is the chief operating officer and a director of IAS, as well as the chief executive officer, secretary and a director of USID. Stuart Leventhal is the president of ABC and Cooper is the president of IAS.

Among the specific allegations in the complaint are that the defendants have violated the FTC Act, which prohibits unfair or deceptive practices, by:

• making false representations that because the consumer's telephone line was used to access defendants' audiotext services by dialing an 800 number, the consumer is legally obligated to pay for such services, even when the consumer did not purchase such services;

• making false representations that the consumer has authorized charges to a credit card for audiotext services accessed by dialing 800 numbers;
  
• failing to disclose the actual amount that a consumer can reasonably expect to pay for international calls placed to access some of the defendants' audiotext services; and
  
• billing and attempting to collect from consumers whose telephones are used to access and purchase audiotext services, but who themselves did not purchase any such services, by taking unfair advantage of those consumers' inability to block telephone calls to 800 and other toll-free numbers.

The complaint also alleges the defendants have violated the 900-Number Rule, which regulates the advertising, operation, billing, and collection of pay-per-call and other audiotext services accessed by calling 900 and 800 numbers, by

• failing to disclose in their telephone solicitation message the cost of their pay-per-call services;
  
• using an 800 number in a manner that results in a charge being assessed for audiotext services conveyed without a presubscription arrangement;

• connecting callers to an audiotext service accessed by dialing a 900 number without providing the required preamble message that includes disclosures about the cost of the service, the fact that the caller can hang up within three seconds of a signal and avoid incurring charges, and other material information.

Consumers with questions about cramming can call the FTC's Cramming Information Line at 202-326-3134.

The Commission vote to file the complaint was 5-0. The complaint was filed today in U.S. District Court for the Central District of California in Los Angeles.

NOTE: The Commission files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

Copies of the complaint and consumer education material about 800 and 900 numbers, including a new consumer brochure titled "Cramming: Mystery Phone Charges," are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 982-3029)
(Civil Action No. 98-3049CBM)