FTC Halts Internet "Cramming"

A scam that targets small businesses, religious organizations, charities, and foundations across the United States by "cramming" charges onto their telephone bills for services that were supposed to be free has been temporarily shut down by a federal District Court at the request of the Federal Trade Commission. According to the FTC, the defendants, through their telemarketing operations, called consumers touting the business benefits of having an Internet presence and offered to design and host an Internet web site for a "free" 30-day trial period. The FTC charged that the telemarketers failed to disclose to consumers that, unless consumers initiate the contact to cancel the service, the defendants would automatically begin charging consumers monthly fees of $19.95 or $24.95. Consumers were never told, the FTC's complaint alleges, that these charges for Internet-related services would be added to their local phone bills. The agency alleges that the scam has taken in more that $9 million for services that were never ordered. The FTC has asked the court to issue a preliminary injunction to prohibit the alleged deceptive practices pending the outcome of a trial, and to order an asset freeze against the defendants to preserve funds for consumer redress.

"These defendants were involved in a big-league deception," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "They threw consumers a curve ball and expected to strike it rich. But as consumers know full well, cramming is scamming and now, the FTC has asked the court to say the game is over."

This case represents the eighth FTC cases involving "cramming" since March 1998. The case was filed in conjunction with the Office of the Attorney General of Minnesota, which filed a separate action, and the Wisconsin Department of Agriculture, Trade and Consumer Protection and Office of the Wisconsin Attorney General, both of which assisted in this case.

The FTC's complaint names as defendants: WebValley, Inc., Profile National Business Directory, Inc., and National Business Directory, Inc., all based in Hopkins, Minnesota; Protel Advantage, Inc., U.S. Protel, Inc., both located in St. Paul. The individuals named by the FTC are Satya P. Garg, owner and president of WebValley, and an owner of Profile, and National; Blaine C. Christofferson, an officer of U.S. Protel, and Scott D. Lee, president of Protel Advantage.

According to the FTC complaint, consumers who were not interested in receiving the defendants' Internet-related services believed that they could simply let the trial period expire without taking affirmative steps to cancel the services. The complaint alleges that, once the trial period expired, the defendants automatically billed consumers on a monthly basis via their telephone bills, without authorization. In numerous instances, according to the complaint, consumers did not notice the unexpected placement of the charges on their phone bills and inadvertently paid the charges for many months. Further, the FTC charged that the defendants, in numerous instances, told consumers that they were legally obligated to pay for Internet-related services charged to consumers' phone bills, when in fact, consumers were not legally obligated to pay the charges because consumers never authorized them.

In addition to requesting a preliminary injunction, the FTC also has asked the court to appoint a receiver to take over the defendants' operations, and to ultimately order a permanent injunction and redress for consumers.

In addition to the law enforcement initiative, the FTC has joined with the Small Business Administration, the Council of Better Business Bureaus, the American Chamber of Commerce Executives, the Yellow Pages Publishers Association and the National Federation of Independent

Businesses to launch an education campaign. The FTC's Business Alert, "Website Woes: Avoiding Web Service Scams," highlights some common web service scams and offers tips on what small businesses can do to protect themselves, including:

• Know your rights. If you receive bills for services you didn't order, don't pay. The law allows you to treat unordered services as a gift.
• Review your phone bills as soon as they arrive. Be on the lookout for charges for services you haven't ordered or authorized
• Assign purchasing to designated staff. And document all your purchases.
• Train your staff in how to respond to telemarketers.
• Buy from people you know and trust.

The campaign partners will disseminate the Business Alert to their colleagues, members, and other interested parties.

The FTC has issued its Third Annual Fraud Report to Congress, "Fighting Consumer Fraud: The Case Against Cramming." The report says "Con artists have found the telephone billing and collection system to be a fertile area to defraud consumers. Taking advantage of changes in the telecommunications industry that began 15 years ago with the break up of AT&T, these stealth 'operators' are arranging to put charges on consumers' phone bills for services that were never ordered, authorized, received or used. ... In only 18 months, cramming has climbed to the number five spot among the categories that generate the most complaints received by the FTC's Consumer Response Center. In fact, since October 1997, the FTC has received more than 10,000 complaints about cramming. The report tells the story of the FTC's response to cramming: how it occurs, the agency's enforcement actions, federal/state activities, proposed changes to the agency's 900-Number (Pay Per Call) Rule, and activities to educate consumers."

The FTC filed its complaint in the U.S. District Court for the District of Minnesota, in St. Paul, under seal, on July 14, 1999. The seal was lifted on July 16, 1999. The Commission vote authorizing staff to file the complaint was 4-0. This matter was handled by the FTC's Chicago Regional Office with the invaluable assistance of the offices of the Attorney General of Minnesota, the Attorney General of Wisconsin and the Wisconsin Department of Agriculture, Trade and Consumer Protection. A companion case was filed jointly by the Office of the Attorneys General of Minnesota and Arizona.

NOTE: The Commission authorizes the filing of 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 actually has violated the law. The case will be decided by the court.

Copies of the complaint 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; 877-FTC-HELP (877-382-4357); 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.

(Civil Action No. 99-1071 DSD/JMM)
(FTC File No. 992 3198)