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Federal Trade Commission v. Verity International, Ltd., et al.

2000 U.S. Dist. Lexis 17946 (S.D.N.Y. December 14, 2000)

Court holds that the FTC is likely to succeed on its claim that defendants' practice of billing telephone line subscribers for international telephone calls made from their telephone lines for the purpose of viewing pornographic web sites violates Section 5(a) of the Federal Trade Commission Act ("FTC Act"). Such violation occurs because the line subscribers are billed even if they neither visited the websites in question nor authorized anyone to do so. The court enjoined defendants from continuing to utilize such billing practices to collect for visits to pornographic web sites unless either (i) the line subscriber receiving the bill has entered into a verifiable agreement authorizing such billing, or (ii) the bill expressly states that the line subscriber is not obligated to pay the bill unless he has personally agreed or authorized another to agree to pay for the services in question and provides the line subscriber with a convenient method to cancel the bill if such is not the case.

Verity International Ltd. ("Verity") bills and collects for access to materials offered by operators of sexually oriented web sites. A computer user who visits one of these sites is invited to enter into a contract pursuant to which, for an agreed price, he will be given access to the web site in question. If the user indicates his assent to be bound by such contract by clicking a screen saying "I Agree", a dialer computer program is downloaded to his computer, which automatically disconnects the user's computer modem from the user's ISP and reconnects the user to the same web site by placing a call to an international telephone number assigned by the relevant country to a Verity affiliate. After the user views the web site, Verity or an affiliate uses the ANI system to ascertain the identity of the subscriber to whom the telephone line employed by the computer user in question is assigned, and sends that line subscriber a bill for use of the web site in question, indicated as a call to Madagascar, at the rate of $3.99 per minute.

To assist it in such billing arrangements, Verity entered into an agreement with Telecom Madagascar by which Verity was given extensive control over a series of international telephone numbers assigned to Telecom Madagascar, including the right to collect for calls placed to such telephone numbers.

Verity made arrangements to have calls placed to these telephone number terminate at servers located in England, on which servers were housed the sexually oriented web sites in question.

Verity then engaged AT&T to handle the billing for these calls. The charges for these calls appeared on customers' bills as charges for telephone calls to Madagascar.

Eventually, Verity decided to handle the billing for these services through Integretel, Inc., which billed the line subscriber only for calls placed to the client sexually oriented web sites. On each bill was a statement that "this bill accounts for international calls from your modem to a Madagascar number, for website access." While an 800 number was provided for complaints and billing inquiries, it was inadequately staffed to handle the volume of complaints received in connection with the bills in question.

During the period September 18 to 22, 2000, the FTC received 548 complaints concerning Verity. In these complaints, the line subscribers who received the bills claimed they were not liable for the bill for a variety of reasons, including that the line subscribers had neither contacted the web site in question nor authorized anyone else to do so, or that a minor in the household had downloaded the dialer program without authorization, the line subscriber billed had both a 900 and international call block on the line in question, or the computer in question was either switched off or in use for another purpose at the time of the alleged use for which the line subscriber was billed.

These complaints apparently echoed AT&T's experience with these calls. AT&T billed for approximately $30,618,447 for such calls, against which it gave consumers adjustments or chargebacks of approximately $11,268,778.

Defendants claimed that each of the calls for which they sent out a bill was in fact placed from the telephone line of the line subscriber billed therefor. However, the court determined that the record before it was sufficient to show that a number of the calls at issue were placed neither by nor with the authorization of the line subscriber billed therefor, but instead by a third party.

The FTC brought this action, seeking to enjoin defendants from continuing these billing practices, and to freeze various assets garnered therefrom. The FTC claimed that by billing line subscribers for these charges, defendants falsely and deceptively represented that the line subscribers were responsible for the unauthorized use of sexually oriented websites by third parties from their telephone lines, which constituted a violation of Section 5(a) of the FTC Act. The FTC also claimed that defendants' practice of representing on their bills that the calls in question were made to Madagascar (when in fact they were not) was also false and deceptive and a violation of Section 5(a) of the FTC Act.

The Court held that by tendering a bill to the line subscribers, the defendants were representing that the line subscriber owed the sums stated thereon for the calls to the pornographic website at issue even if the line subscriber did not make or authorize the call to be made. The Court reached this conclusion notwithstanding the fact that the bill did not expressly so state.

The Court further held that the line subscribers had no obligation, via contract or otherwise, to pay for calls they neither made nor authorized. The contracts made by those who actually used the sites did not bind the line subscriber to pay, because the contracting party/site user had no authority to bind the line subscriber.

Nor did the "filed rate doctrine" provide a basis for holding the line subscriber responsible for unauthorized calls placed from his line to servers for the purpose of viewing pornographic web sites. Pursuant to various tariffs, a telephone line subscriber is legally obligated to pay for any calls made from his line whether authorized or not. However, as explained by the court, these tariffs only applied to "basic communication services" and not enhanced or information services of the type offered by defendants' clients. As such, the "filed rate doctrine" did not provide a basis for claiming that the line subscriber was responsible for the type of unauthorized calls at issue.

The court further found that the FTC was likely to prevail on its claim that defendants' billing practices were unfair trade practices that violated of Section 5(a). An act is "unfair if it 'causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition." Defendants argued that there was no unfair trade practice because consumers could protect themselves by preventing unauthorized access to their phone lines. The court rejected this argument based, at this stage of the litigation, on evidence that defendants appeared to bill line subscribers who had attempted to block their lines from being used for 900 and international calls, and because compelling line subscribers to prevent unauthorized use of their phone lines would pose an unreasonable burden on them in light of the other alternatives available to the court.

The court held that the FTC was also likely to establish that the individual defendants were personally liable for the violations of the FTC Act noted above, given their personal involvement in the activities in question, and their authority to control Verity.

As a result, the court decided to award the FTC injunctive relief. However, the court declined to enjoin defendants from using all forms of ANI based billing to collect the charges in question. Rather, the court enjoined defendants from billing line subscribers for the calls at issue unless either (i) the line subscriber receiving the bill has entered into a verifiable agreement authorizing such billing, or (ii) the bill expressly states that the line subscriber is not obligated to pay the bill unless he has personally agreed or authorized another to agree to pay for the services in question and provides the line subscriber with a convenient method to cancel the bill if such is not the case.

The court also issued an injunction freezing all sums collected by defendants pursuant to various bills they sent out, and directed further that defendants either post a bond in an amount to be agreed upon by the parties which was substantially in excess of $1 million or that the freeze will extend to all future sums collected by Verity, and require "repatriation" of the assets of the Verity defendants. This relief was granted to aid the FTC in obtaining restitution, refund of monies paid, and disgorgment of gains reaped by defendants if it is ultimately proven that defendants violated the FTC Act as claimed in the FTC's complaint.

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