FTC enforces New Telemarketing Sales Rule against magazine subscription sellers

The core of both cases is the defendants' alleged debiting of consumers' bank accounts without the consumers express authorizations.

he Federal Trade Commission has instituted actions against two groups of telemarketers selling magazine subscriptions for alleged violations of the Federal Trade Commission's New Telemarketing Sales Rule and other false and deceptive practices. The case represents the FTC's first enforcement action under the new Rule, and represents a strong warning to the entire telemarketing industry that the FTC is serious about enforcement of the Rule.

The complaints were filed against Diversified Marketing Service Corporation of Oklahoma City and its president, H.G. Kuykendall Jr., and several companies doing business under the names Wholesale Magazine, Premium Magazine, Magazine Express, Magazines Unlimited, Magazines of America, Magazines Limited, Magazine Distributors of America, and various officers of those companies, collectively referred to in the FTC complaints as the Windward defendants. In both cases, the FTC alleged that the defendants sold their magazine subscriptions by placing cold sales calls to consumers and making a variety of misrepresentations.

Diversified charged consumers from $500 to $800 for a package of subscriptions while the Windward defendants debited consumers' accounts for a lump sum of about $300. At the core of both cases is the defendants' alleged debiting of consumers' bank accounts without the consumers' express authorizations. In the complaint against Diversified, the FTC has alleged that the defendant telemarketers made numerous false representations about the cost of the magazine subscriptions, including false claims about the cost of the subscriptions, false claims about the length of the subscriptions, claims that certain of the magazines were free or that consumers had to pay only the costs of shipping and handling. The complaint also charges the defendants with falsely representing to consumers that they must divulge their checking account or credit card information for purposes other than debiting the consumers' accounts for magazine subscriptions, when, in fact, the defendants used the customers' checking account and/or credit card account information solely for purposes of billing for magazine subscriptions without the consumers' express authorization. The complaint also charges the defendants with falsely representing to consumers that they could cancel their subscriptions at any time or within a specified time, and then failing to cancel subscriptions when requested by consumers.

Similarly in the complaint against the Windward defendants, the FTC has alleged that the defendants falsely represented to consumers that they must divulge their bank account or credit card information for purposes other than debiting the consumers' bank accounts, when, in fact, defendants have used the consumers' account information solely for purposes of billing for magazines subscriptions without the consumers' express authorization. The complaint against the Windward defendants also challenges the practice whereby the defendants offered "cash certificates for the purchase of groceries" as a premium to those who ordered a subscription, when all the consumers received was a survey they had to complete to then receive discount coupons on certain grocery products. The FTC complaint alleges that the false representations and check-debiting procedures engaged in by the defendants violate not only the general prohibitions of the FTC Act against false and deceptive practices, but also the express provisions of the FTC's Telemarketing Sales Rule, which prohibits the use of demand drafts for purposes of debiting a consumer's checking account without the consumer's express written authorization.

The FTC Telemarketing Sales Rule, which went into effect on December 31, 1995, sets forth detailed provisions as to how consumers' express authorization can be obtained. Under the Rule, express authorization can be obtained either in writing or orally. If the authorization is oral, the conversation must be tape recorded and must cover the following information: the date of the draft, the amount of the draft, the payer's name, the number of draft payments, a telephone number for customer inquiry and the date of the customer's oral authorization.

One interesting aspect of these cases is that in addition to the express prohibition against check debiting without express authorization by the consumer, the Telemarketing Sales Rule also contains a general prohibition against making any false representations concerning any material aspect of the performance, efficacy, nature or central characteristics of the goods or services that are the subject of the sales offer. In these complaints, the FTC has charged that the alleged misrepresentations made by the defendants constitute not only a violation of the FTC's general prohibitions against false and deceptive advertising, but also a violation of the specific provisions of the Telemarketing Sales Rule prohibiting such material false representations.

As has been characteristic of recent actions by the FTC in the telemarketing arena, the relief sought by the FTC is severe. Specifically, the FTC is seeking injunctive relief against the defendants, restitution of monies to consumers and disgorgement by the defendants of any profits made in the venture.

In the case of the action against Diversified, the FTC also obtained an asset freeze against the defendants and the appointment of a receiver.

It is also worth noting that these actions were again the result of joint enforcement initiatives undertaken by the FTC in cooperation with state and local law enforcement officials. Other law enforcement authorities who assisted in these cases included the Attorneys General and the U.S. Postal Inspection Services.

Linda Goldstein is a partner in Hall Dickler Kent Friedman & Wood LLP, and is also head of the firm's advertising, promotion and new media law department. She represents advertising and sales promotion agencies nationwide and serves as a special advertising counsel to Fortune 500

and leading consumer product companies.

Copyright Technology Marketing Corporation Jun 1996
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