The Federal Trade Commission is coming after "dialers," and in a big way. That event, itself worthy of note, also gives us a chance to put into perspective what is and is not fair - or legal, in terms of business practices.
Scams are not new; they just evolve with the times. There are two general categories of scams.
Scam Category 1 is straightforward theft. The scamster tells the victim that the scamster will produce some product or service in return for the victim's money. Once the victim provides the money, the scamster disappears.
Scam Category 2 also is a process of taking advantage of the trusting victims, under a claim of being technically legal. The Category 2 scamster gets the best of the victim for failing to read the fine print, for example. Scam Category 2 is what is at issue today.
As an example of a Category 2 scam, there have been stories in the media of late about rent-a-car companies that put into their rental vehicles electronic GPS devices that can determine when the car is speeding. A relatively inconspicuous provision in the rental agreement provides that the customer agrees to pay a "fine" to the rent-a-car company for speeding - hundreds of dollars. The customer is thereby alarmed to discover upon returning the car that, added to the $125 charge for two days of car rental, is $500 worth of speeding "fines." This is perfectly legal in the sense that it is not a Category 1 scam; the customer signed a contract agreeing to pay these fines. Thus, the rent-a-car company claims that the speeding fines are technically proper. Authorities, however, may claim that it is an unfair - and thereby illegal - business practice.
The rent-a-car-speeding-fine case perhaps provides a good example of Scam Category 2, because readers of this column likely rent automobiles from time to time. Picture yourself as the car renter with a $500 "fine" added to your rent-a-car tab. Will you just pay it, feeling that the "fine" was warranted owing to your misbehavior and that the rent-a-car company is entitled to it because you increased the company's risk of an insurance loss? No way! Enough of you will complain to draw a response.
Government responds vigorously to Category 2 scams. When you and dozens of others gripe about the rent-a-car-speeding-fine scam, politicians will respond, because the public at large is more likely to sympathize with the speeders than the rent-a-car companies.
The Internet has spawned unprecedented opportunities for both categories of scams. Scam Category 1 over the Internet is simply a new twist on obtaining money by false pretext. The Internet only provides a more efficient method of propagating the Category 1 scam. Nonetheless, existing fraud laws can effectively be deployed against Category 1 scams.
While the Internet increases the efficiency of Category 1 scams, it rockets Category 2 scams right into the stratosphere. Compare audiotext with dialers:
In the 1980s, audiotext (aka "dial-a-porn") services exploded onto the scene. Just dial a "976" number (later a "900" number) and talk sex with a starlet. Resulting thousand-dollar phone bills sent federal and state governments chasing like hunting dogs after the service providers. The Helms Amendment for the most part disconnected the 900 numbers from dial-a-porn, although it took a few tries to accomplish that.
Dialers have caused a similar reaction. As described in a recent Federal Trade Commission press release:
"An Internet adult entertainment operation that billed some consumers by rerouting their connection to the Net through the foreign country of Madagascar, causing the unwitting consumers to incur hundreds of dollars in international long-distance fees, has agreed to settle Federal Trade Commission charges that the billing scheme was unfair and deceptive and violated federal law. The settlement will bar the defendants from billing consumers without express, verifiable authorization in the future, and requires that they pay more than $26,000 in consumer redress."
The Federal Trade Commission, you will recall (AVN Online, December 1999), is an independent federal agency that, under the Federal Trade Commission Act, is in the business of preventing unfair methods of competition and other unfair or deceptive acts that might injure consumers. The FTC wields a broad arsenal of legal weapons against activities that it believes are "unfair," "deceptive," and/or "injurious to consumers." These are extraordinarily vague, the result of which is that the terms "unfair," "deceptive," and "injurious to consumers" tend to mean whatever the FTC wants them to mean, particularly focused on Category 2 scams that cannot be abated by traditional fraud statutes that cover Category 1 scams.
The FTC also has its own trade regulation rules, which spell out more specifically what the Commission thinks is fair and what it thinks is not fair. If the FTC thinks something is unfair and you disagree, be prepared to spend a ton of money on lawyers. The FTC is now full-tilt into the Internet, and has been for a couple of years.
The Commission has the power to bring lawsuits to undo what it finds to be an unfair or deceptive trade practice, seeking money and orders stopping such practices. The dialer case is an example of the FTC's exercise of that power.
Expect that the FTC's attack on the particular company noted in its press release is not the only such action, nor the last. Further expect that Congress will get into the act as well. Just as the Helms Amendment for the most part extinguished phone-company billing of audiotext, Congress probably will step in here as well. Remember, telephone companies are regulated. Dialers can work only if the phone company is allowed to collect the bill generated by the dialers.
States can step in also. For example, in California, courts are powerless to collect gambling debts. A recent case allowed a cardholder to blow off his credit card bill to the extent that it was generated by gambling in Las Vegas. The same approach could be taken with respect to dialers, despite the fact that the dialer is in Madagascar; phone companies are subject to state regulations and tariffs.
Dialers are an extreme example. But, as with the rent-a-car speeding fines, the public will not empathize with dialers. Nor will they empathize with many of the other practices that are prevalent in this industry.
If you give your customers a fair shake - charge them a reasonable price and sell them only what they actually want - you will likely be on safe ground. If you are a Category 2 scamster, then - like a bank robber - the only question is whether you will be caught.
Clyde DeWitt is a partner in the Los Angeles, California law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025 or over the Internet at [email protected]. Readers are considered a valuable source of court decisions, legal gossip, and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases, and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
