Crammers Settle FTC Charges (October 1999)

Defendants who crammed charges onto consumers phone bills for services they did not order or authorize have agreed to settle Federal Trade Commission charges that their practices violated federal laws. The settlement provides $1.6 million in redress for consumers who were victims of the unauthorized charges, and will bar the deceptive practices in the future.

In July 1998, the FTC filed a complaint in U.S. District Court in San Antonio, TX, against Hold Billing Services, Ltd.; HBS, Inc.; Avery Communications, Inc.; its president Thomas M. Lyons; Veterans of America Association, Inc. (VOAA); and its president, Keith Calil, and treasurer Milford H. Balaban. The complaint alleges that VOAA marketed memberships to consumers by conducting sweepstakes or prize promotions at local shopping malls, convention centers and fairgrounds.

To enter VOAA's sweepstakes, consumers filled out a form that required their name, address and telephone number. The complaint charges that VOAA did not disclose adequately that it construed a completed entry form as an order for its membership services, or that monthly charges would appear on the billing statement for the telephone number the consumer listed on the form.

VOAA transmitted consumers' telephone numbers to Hold Billing, a billing aggregator, which in turn passed the charges on to the local telephone companies so that the charges would be included on consumers' phone bills. The FTC alleged that both VOAA and Hold Billing misrepresented that consumers were legally obligated to pay charges on their telephone bills for VOAA's services when, in many cases, these consumers had neither ordered the services nor authorized the charges; and that these defendants unfairly billed and attempted to collect payment by telling consumers that they were legally responsible for the charges, regardless of who, if anyone, ordered and received the service.

The settlement would require Hold Billing to pay $250,000 in redress, in addition to the $1.375 million in refunds they have already issued to consumers on whose bills unauthorized charges had appeared. A redress judgment of an additional $2.1 million against VOAA and its officers is suspended, subject to a right to reopen if their sworn financial statements misrepresented their inability to make a redress payment. All the defendants would be barred from billing for any goods or services purchased in connection with a sweepstakes, prize promotion or negative-option marketing plan. Hold Billing would be barred from billing for charges not expressly authorized by consumers, and prohibited from misrepresenting that consumers are obligated to pay for purchases they did not authorize. Hold Billing also would be required to respond to consumer complaints and investigate billing disputes promptly, and to maintain records on companies for which it acts as a billing aggregation firm.

VOAA and its officers would be barred from billing consumers for any goods or services unless they disclose the total cost of the goods or services; the number and amount of the payments; the refund and cancellation terms and any other conditions material to the sale. The settlement also would bar them from misrepresenting the nonprofit or charitable status of any organization, or their affiliation with any veterans, law enforcement, fire fighting or other non-profit organization, and would require a $100,000 performance bond before they solicit or receive payments to benefit any nonprofit charitable organization or any organization using a name that implies that it is a non-profit or charitable organization. They would be barred from selling or renting any identifying information about the consumers they billed, and would be required to maintain certain records that will allow the FTC to monitor compliance.

The FTC has developed some tips to help consumers avoid cramming scams:

• Be aware that your local telephone company may bill for services provided by other companies.
• Carefully read the fine print before you fill out contest forms, especially if they ask for your phone number. Likewise, read the fine print before you place a call in response to a sweepstakes promotion.
• Be cautious about calling unfamiliar 800 numbers. Be especially wary if you're told to enter codes, leave your name, or answer "yes" to prompts. Unscrupulous entertainment providers may use this ruse to send you a bill.
• Consider a 900-number block; it stops calls from going through to 900-number services. Call your local phone company for details.
• Carefully check your phone bill every month for unfamiliar charges. Sometimes, a call placed to a toll-free number may be fraudulently billed as a 900 number, collect call, or international call.
• Examine your phone bill for recurring monthly charges. These charges typically appear as "Miscellaneous Charges and Credits." They may be so small, or described in such general terms, that they're easy to overlook or to confuse with valid services you may have ordered from another provider.

The Commission vote authorizing the filing of the settlements was 4-0, with Commissioner Orson Swindle dissenting in part. Commissioner Sheila F. Anthony also issued a statement, in which she was joined by Chairman Pitofsky and Commissioner Thompson.

Commissioner Swindle dissented as to Paragraphs III and IV of the VOAA order, which require defendants to obtain a $100,000 performance bond before engaging in charitable solicitations and prohibit misrepresentations in connection with such solicitations. In his statement, he explained that because "there are no corresponding allegations in the complaint relating to solicitations for nonprofit or charitable organizations (or solicitations for for-profit organizations with names similar to nonprofit or charitable organizations), [he] object[ed] to these order provisions because they are not reasonably related to the violations alleged."

Swindle stressed that "[c]omplaint allegations force the government to articulate with some specificity what it believes a defendant has done in violation of the law." He further said, " I do not think that it is in the public interest for the Commission to base relief on inchoate, unalleged theories of violation. In a system of limited governmental power, it is critical that the government articulate the reasons why a defendant has violated the law before it acts to restrict the defendant's individual freedom." In conclusion, he wrote, "[E]ven assuming that the complaint had been amended to include an allegation relating to charitable solicitation, I believe the public interest would be better served if the Commission imposed forms of relief that are less restrictive than a substantial and permanent bond requirement burdening nonmisleading, fully protected speech."

In response to Commissioner Swindle's partial dissent, Commissioner Anthony explained that, occasionally, in the course of litigating a case, "evidence of additional violations, or evidence confirming violations only suspected by the Commission at the outset, comes to light."

In such instances, "the Commission's responsibility to protect consumers mandates that [it] obtain relief to address these additional violations." One issue the Commission faces in such situations is whether it is necessary and appropriate to amend the complaint to reflect the additional violations. The majority concluded that in this case no amendment was necessary because "the violations addressed in Paragraphs III and IV of the orders are part and parcel of one of the deceptive practices placed at issue in the complaint, namely, deceiving consumers into filling out what appear to be sweepstakes entry forms in support of a veterans' charitable organization which the VOAA defendants, in turn, treated as binding contracts to purchase services." Commissioner Anthony added that VOAA, "despite what one might assume from its name, is a for-profit company engaged in the sale of voice mail services."

The majority also rejected Commissioner Swindle's contention that the $100,000 bond requirement unduly burdens defendants' First Amendment speech rights. Commissioner Anthony explained the "the VOAA defendants utilized the guise of a charitable organization in order both to add an air of legitimacy to their deception and to cash in on consumers' goodwill towards, and desire to help, veterans." She continued that, based upon the evidence in this case, the bond requirement is appropriate as well as necessary "to protect consumers from such conduct in the future." She added that, "This fencing-in relief strikes an appropriate balance between protecting consumers and burdening defendants' speech rights," and noted that "the provisions of Paragraphs III and IV of the orders are the same as those used by the Commission in prior charities fraud cases."

NOTE: A stipulated final judgment and order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.

Copies of the stipulated final judgments and orders, FTC Commissioners' public statements and responses, 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, 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.

(FTC File No. X98 0069)