Appendix — Mainstream Marketing Services, Inc. v. Federal Trade Commission

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(2) no.os. 03 1552 Mi 14 2008

IN THE

Supreme Court of the Anited States

AMERICAN TELESERVICES ASSOCIATION, MAINSTREAM

MARKETING SERVICES, INC., AND TMG MARKETING, INC.,

Petitioners,

Vv.

FEDERAL TRADE COMMISSION, FEDERAL COMMUNICATIONS

COMMISSION, AND UNITED STATES,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Tenth Circuit

APPENDIX TO PETITION FOR A

WRIT OF CERTIORARI (Continued)

VOLUME II

ROBERT CORN-REVERE *

RONALD G. LONDON

JEFFREY L. FISHER

: KAVITA AMAR

; SONJA WEST

: DAVIS WRIGHT TREMAINE LLP

1500 K Street, N.W., Suite 450

Washington, D.C. 20005

(202) 508-6600

SEAN R. GALLAGHER

HOGAN & HARTSON LLP

1200 17th Street, Suite 1500

Denver, Colorado 80202

(303) 899-7300

* Counsel of Record Counsel for Petitioners

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D.C. 20001

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venir e we ee AE eee eae eS ee

TABLE OF CONTENTS

Mainstream Mktg. Servs., Inc. v. FT C, 358 F.3d 1228

a cate, Ee le

FTC v. Mainstream Mktg. Servs., Inc., 345 F.3d 850

(10th Cir. 2004) vad oheihpnieainbspeenanetiscabstbnniwessdedeierscameiceiec.,

Mainstream Mktg. Servs., Inc. y. FCC, No. 03-9571,

Order Denying Stay (10th Cir. Sept. 26, 2003) ........

- Mainstream Mktg. Servs., Inc. y. F CC, 284 F.Supp.2d

1266 (D. Colo. 2003) ......ecccsssssseessssssssseeeseessesscc.

Mainstream Mktg. Servs., Inc. y. FCC, 283 F.Supp.2d

N15] (D. Colo. 2003) ...eeeccsssssssssesssssssssssseeeccceesscs....

Telemarketing Sales Rule Fees; Final Rule, 68 Fed.

BORG FOTO MNOIY esis sscevsnsesrorscriscssscirisnsdencesscs. <2.

T elemarketing Sales Rule; Final Rule, 68 Fed. Reg.

ONE soisibtsticieilesriiectissinliiniceeduela ce.

Rules and Regulations Implementing the Telephone

Consumer Protection Act of 1991, 18 FCC Red

seach commas Fe Te

Rules and Regulations Implementing the T, elephone

Consumer Protection Act of 1991, 18 FCC Red

Wiaiain seuss, OD

Rules ana Regulations Implementing the Telephone

Consumer Protection Act of 1991, 17 FCC Red

WPM O MN sshecesescsvercsuicconmuriiiyducestgiss gt: baie

Telemarketing and Consumer Fraud and Abuse

Prevention Act, 15 U.S.C. §§ 6101-6108 ow...

Do-Not-Call Implementation Act, Pub. L. 108-10, 117

Stat. 557 (2003), codified as Notes to 15 U.S.C.

PE Wistrotieiiiaidinscreaslingihalicaidwadepmeiccuizcalinn.,.

Page

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TABLE OF CONTENTS—Continued

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Telephone Consumer Protection Act, 47 U.S.C.

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APPENDIX G

[SEAL] FEDERAL TRADE COMMISSION

RULES and REGULATIONS

16 CFR Part 310 Telemarketing Sales Rule

Wednesday, January 29, 2003

AGENCY: Federal Trade Commission.

ACTION: Final Amended Rule.

SUMMARY: In this document, the Federal Trade

Commission (“FTC” or “Commission”) issues its Statement

of Basis and Purpose (“SBP”) and final amended

Telemarketing Sales Rule (“amended Rule”). The amended

Rule sets forth the FTC’s amendments to the Telemarketing

Sales Rule (“original Rule” or “TSR”). The amended Rule is

issued pursuant to the Commission’s Rule Review, the

Telemarketing and Consumer Fraud and Abuse Prevention

Act (“Telemarketing Act” or “Act”) and the Uniting and

Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct Terrorism Act (“USA

PATRIOT Act”).

EFFECTIVE DATES: The amended Rule will become

effective March 31, 2003. Full compliance with

§ 310.4(a)(7), the caller identification transmission provision,

is required by January 29, 2004. The Commission will

announce at a future time the date by which full compliance

with § § 310.4(b)(1)(iii)(B), the “do-not-call” registry

provision, will be required. The Commission anticipates that

full compliance with the “do-not-call” provision will be

required approximately seven months from the date a contract

is awarded to create the national registry.

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ADDRESSES: Requests for copies of the amended Rule

and this SBP should be sent to: Public Reference Branch,

Room 130, Federal Trade Commission, 600 Pennsylvania

Avenue, N.W., Washington, DC 20580. The complete record

of this proceeding is also available at that address. Relevant

portions of the proceeding, including the amended Rule and

SBP, are available at http:// www. ftc.gov.

FOR FURTHER INFORMATION CONTACT: Catherine

Harrington-McBride, (202) 326-2452, Karen Leonard, (202)

326-3597, Michael Goodman, (202) 326-3071, or Carole

Danielson, (202) 326-3115, Division of Marketing Practices,

Bureau of Consumer Protection, Federal Trade Commission,

600 Pennsylvania Avenue, N.W., Washington, DC 20580.

SUPPLEMENTARY INFORMATION: The amended

Rule: (1) retains most of the original Rule’s requirements

concerning deceptive and abusive telemarketing acts or

practices without major substantive changes; (2) establishes a

national “do-not-call” registry maintained by the Commis-

sion; (3) defines “upselling” to clarify the amended Rule’s

application to these transactions, requires specific disclosures

for upsell transactions, and expressly excludes upselling

transactions from certain exemptions in the amended Rule;

(4) requires that sellers and telemarketers accepting payment

by methods other than credit and debit cards subject to certain

protections obtain express verifiable authorization from their

customers; (5) retains the exemptions for pay-per-call,

franchise, and face-to-face transactions, but makes these

transactions subject to the national “do-not-call” registry and

certain other provisions in the abusive practices section of the

Rule; (6) specifies requirements for the use of predictive

dialers; (7) requires disclosures and prohibits misrepresent-

ations im connection with the sale of credit card loss

protection plans; (8) requires an additional disclosure in

connection with prize promotions; (9) requires disclosures

and prohibits misrepresentations in connection with offers

;

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that include a negative option feature; (10) eliminates the

general media and direct mail exemptions for the

telemarketing of credit card loss protection plans and business

opportunities other than business arrangements covered by

the Franchise Rule '; (11) requires telemarketers to transmit

caller identification information; (12) eliminates the use of

post-transaction written confirmation as a means of obtaining

a customer’s express verifiable authorization when the goods

or services are offered on a “free-to-pay conversion” basis;

(13) prohibits the disclosure or receipt of the customer’s or

donor’s unencrypted billing information for consideration,

except in limited circumstances; and (14) requires that the

seller or telemarketer obtain the customer’s express informed

consent to all transactions, with specific requirements for

transactions involving ‘“free-to-pay conversions” and

preacquired account information.

Statement of Basis and Purpose

I. Background

A. Telemarketing and Consumer Fraud and Abuse

Prevention Act.

The early 1990s saw heightened Congressional attention to

burgeoning problems with telemarketing fraud.2 The

culmination of Congressional efforts to protect consumers

' Disclosure Requirements and Prohibitions Concerning Franchising

and Business Opportunity Ventures (‘Franchise Rule”), 16 CFR Part 436.

? Statutes enacted by Congress to address telemarketing fraud during

the early 1990s include the Telephone Consumer Protection Act of 1991

(“TCPA”), 47 U.S.C. 227 et seq., which restricts the use of automatic

dialers, bans the sending of unsolicited commercial facsimile

transmissions, and directs the Federal Communications Commission

(“FCC”) to explore ways to protect residential telephone subscribers’

privacy rights; and the Senior Citizens Against Marketing Scams Act of

1994, 18 U.S.C. 2325 et seq., which provides for enhanced prison

sentences for certain telemarketing-related crimes.

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against telemarketing fraud occurred in 1994 with the passage

of the Telemarketing Act, which was signed into law on

August 16, 1994.° The purpose of the Act was to combat

telemarketing fraud by providing law enforcement agencies

with new tools and to give consumers new protections.

The Telemarketing Act directed the Commission to issue a

rule prohibiting deceptive and abusive telemarketing acts or

practices, and specified, among other things, certain acts or

practices the FTC’s rule must address. The Act also required

the Commission to include provisions relating to three

specific “abusive telemarketing acts or practices:” (1) a

requirement that telemarketers may not undertake a pattern of

unsolicited telephone calls which the consumer would

consider coercive or abusive of his or her right to privacy; (2)

restrictions on the time of day telemarketers may make

unsolicited calls to consumers; and (3) a requirement that

telemarketers promptly and clearly disclose in all sales calls

to consumers that the purpose of the call is to sell goods or

services, and make other disclosures deemed appropriate by

the Commission, including the nature and price of the goods

or services sold.* Section 6102(a) of the Act not only required

the Commission to define and prohibit deceptive telemarket-

ing acts or practices, but also authorized the FTC to define

and prohibit acts or practices that “assist or facilitate”

deceptive telemarketing.” The Act further directed the

Commission to consider including recordkeeping require-

ments in the rule.° Finally, the Act authorized state Attorneys

315 U.S.C. 6101-6108.

415 U.S.C. 6102(a)(3)(A)-(C).

> Examples of practices that would “assist or facilitate” deceptive

telemarketing under the Rule include credit card laundering and providing

contact lists or promotional materials to fraudulent sellers or

telemarketers. See 60 FR 43842, 43853 (Aug. 23, 1995).

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General, other appropriate state officials, and private persons

to bring civil actions in federal district court to enforce

compliance with the FTC’s rule.’

B. Original Rule.

The FTC adopted the original Rule on August 16, 1995."

The Rule, which became effective on December 31, 1995,

requires that telemarketers promptly tell each consumer they

call several key pieces of information: (1) the identity of the

seller; (2) the fact that the purpose of the call is to sell goods

or services; (3) the nature of the goods or services being

offered; and (4) in the case of prize promotions, that no

purchase or payment is necessary to win.’ Telemarketers

must, in any telephone sales call, also disclose cost and other

material information before consumers pay.'? In addition, the

original Rule requires that telemarketers have consumers’

express verifiable authorization before using a demand draft

(or “phone check”) to debit consumers’ bank accounts.'' The

original Rule prohibits telemarketers from calling before 8:00

a.m. or after 9:00 p.m. (in the time zone where the consumer

is located), and from calling consumers who have said they

do not want to be called by or on behalf of a particular

seller.'* The original Rule also prohibits misrepresentations

about the cost, quantity, and other material aspects of the

offered goods or services, and the terms and conditions of the

offer.'? Finally, the original Rule bans telemarketers who

offer te arrange loans, provide credit repair services, or

715 U.S.C. 6103, 6104.

* 60 FR at 43842 (codified at 16 CFR 310 (1995)).

* 16 CFR 310.4(d).

'° 16 CFR 310.3(a)(1).

'' 16 CFR 310.3(a)(3).

"2 16 CFR 310.4(c), and 310.4(b)(1)(ii).

'? 16 CFR 310.3(a)(2).

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recover money lost by a consumer in a prior telemarketing

scam from seeking payment before rendering the promised

services," and prohibits credit card laundering and other

forms of assisting and facilitating fraudulent telemarketers.

The Rule expressly exempts from its coverage several

types of calls, including calls where the transaction is

completed after a face-to-face sales presentation, calls subject

to regulation under other FTC fules (e.g., the Pay-Per-Call

Rule,’° or the Franchise Rule),'’ calls initiated by consumers

that are not in response to any solicitation, calls initiated by

consumers in response to direct mail, provided certain

disclosures are made, and calls initiated by consumers in

response to advertisements in general media, such as

newspapers or television.'® Lastly, catalog sales are exempt,

as are most business-to-business calls, except those involving

the sale of non-durable office or cleaning supplies.'”

'* 16 CFR 310.4(a)(2)-(4).

'S 16 CFR 310.3(b) and (c).

®° Trade Regulation Rule Pursuant to the Telephone Disclosure and

Dispute Resolution Act of 1992 (“Pay-Per-Call Rule”), 16 CFR Part 308.

'7 16 CFR 310.6(a)-(c).

'® 16 CFR 310.6(d)-(f).

” 16 CFR 310.2(u) (pursuant to 15 U.S.C. 6106(4) (catalog sales)); 16

CFR 310.6(g) (business-to-business sales). In addition to these

exemptions, certain entities including banks, credit unions, savings and

loans, common carriers engaged in common carrier activity, non-profit

organizations, and companies engaged in the business of insurance

regulated by state law are not covered by the Rule because they are

specifically exempt from coverage under the FTC Act. 15 U.S.C.

45(a)(2); but see > discussion below concerning the USA PATRIOT Act

amendments to the Telemarketing Act. Finally, a number of entities, and

individuals associated with them, that sell investments and are subject to

the jurisdiction of the Securities and Exchange Commission or the

Commodity Futures Trading Commission are exempt from the Rule. 15

U.S.C. 6102(d)(2)(A); 6102(e)(1).

a Ae nt Si lt gelatin = at a

‘

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C. Rule Review and Request for Comment.

The Telemarketing Act required that the Commission

initiate a Rule Review proceeding to evaluate the Rule’s

operation no later than five years after its effective date of

December 31, 1995, and report the results of the review to

Congress.”” Accordingly, on November 24, 1999, the

Commission commenced the mandatory review with

publication of a Federal Register notice announcing that

Commission staff would conduct a forum on January 11,

2000, limited to examination of issues related to the “do-not-

call” provision of the Rule, and soliciting applications to

participate in the forum.”!

On February 28, 2000, the Commission published a second

notice in the Federal Register, broadening the scope of the

inquiry to encompass the effectiveness of all the Rule’s

provisions. This notice invited comments on the Rule as a

whole and announced a second public forum to discuss the

provisions of the Rule other than the ‘“do-not-call”

provision.” In response to this notice, the Commission

received 92 comments from representatives of industry, law

915 U.S.C. 6108.

*! 64 FR 66124 (Nov. 24, 1999). Comments regarding the Rule’s “do-

not-call” provision, § 310.4(b)(1)(ii), as well as the other provisions of the

Rule, were solicited in a later Federal Register notice on February 28,

2000. See 65 FR 10428 (Feb. 28, 2000). Seventeen associations,

individual businesses, consumer groups, and law enforcement agencies

were selected to engage in the forum’s roundtable discussion (“Do-Not-

Call” Forum), which was held on January |1, 2000, at the FTC offices in

Washington, D.C. References to the “Do-Not-Call” Forum transcript are

cited as “DNC Tr.” followed by the appropriate page designation.

_™ 65 FR 10428 (Feb. 28, 2000) (the “February 28 Notice”), The

Commission extended the comment period from April 27, 2000, to May

30, 2000, 65 FR 26161 (May 5, 2000).

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enforcement, and consumer groups, as well as from

Narn 23

individual consumers.

The commenters generally praised the effectiveness of the

TSR in combating the fraudulent practices that had plagued

the telemarketing industry before the Rule was promulgated.

They also strongly supported the Rule’s continuing role as the

centerpiece of federal and state efforts to protect consumers

from interstate telemarketing fraud. Commenters consistently

stressed that it is important to retain the Rule. However,

commenters were less sanguine about the effectiveness of the

Rule’s provisions dealing with consumers’ right to privacy,

such as the “do-not-call” provision and the provision

restricting calling times. They also identified a number of

areas of continuing or developing fraud and abuse, as well as

ihe emergence of new technologies that affect telemarketin,,

for industry members and consumers alike. Commenters

identified several changes in the marketplace that had

occurred in the five years since the Rule was promulgated and

that threatened the Rule’s effectiveness. Those changes

included increased consumer concern about personal

3 A list of the commenters and the acronyms used to identify each

commenter who submitted a comment in response to the February 28

Notice is attached hereto as Appendix A. Appendix B is a list of the

commenters and the acronyms used to identify each commenter who

submitted a comment in response to the Notice of Proposed Rulemaking

(“NPRM”), discussed below, including supplemental comments and

comments submitted on the user fee proposal. References to comments

are cited by the commenter’s acronym followed by the appropriate page

designation. “RR” after the commenter’s acronym indicates that the

comment was received in response to the Rule Review. “NPRM” after

the commenter’s acronym indicates that the comment was received in

response to the NPRM. “Supp.” after the commenter’s acronym indicates

that the comment was received as a Supplemental Comment. “User Fee”

after the commenter’s acronym indicates the comment was submitted in

response to the request for comments on the Commission’s user fee

proposal.

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privacy,”* the development of novel payment methods,”° and

the increased use of preacquired account telemarketing °6 and

upselling.’

Following the receipt of public comments, the Commission

held a second forum on July 27 and 28, 2000 (“Rule Review

Forum’’), to discuss provisions of the Rule other than the “do-

** The past several years have seen a greater public and governmental

focus on the “do-not-call” issue. Related to the “do-not-call” issue is the

proliferation of technologies, such as caller identification service, that

assist consumers in managing incoming calls to their homes. Similarly,

privacy advocates have raised concerns about technologies used by

telen:arketers (such as predictive dialers and deliberate blocking of caller

identification information) that hinder consumers’ attempts to screen calls

or make requests to b= placed on a “do-not-call” list.

> The growth of electronic commerce and payment systems technology

has led, and likely will continue to lead, to new forms of payment and

further changes in the way consumers pay for goods and services they

purchase through telemarketing. In addition, billing and collection

systems of telephone companies, utilities, and mortgage lenders are

becoming increasingly available to a [wide variety of vendors of all types

of goods and services. These newly available payment methods in many

instances are relatively untested, and may not provide protections for

consumers from unauthorized charges.

°° The practice of preacquired account telemarketing—where a

telemarketer acquires the customer’sbilling information prior to initiating

a telemarketing call or transaction—has increasingly resulted in

complaints from consumers about unauthorized charges. _ Billing

information can be preacquired in a variety of ways, including from a

consumer’sutility company, from the consumer in a previous transaction,

or from another source. In many instances, the consumer is not involved

in the transfer o! the billing information and is unaware that the seller

possesses it during the telemarketing call.

7 The practice of “upselling” has also become more prevalent in

telemarketing. Through this technique, customers are offered additional

items for purchase after the completion of an initial sale. In the majority

of upselling scenarios, the seller or telemarketer aiready has received the

consumer’s billing information, either from the consumer or from another

source.

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not-call” provision and to discuss the Rule’s effectiveness.”®

Both the “Do-Not-Call” Forum and the Rule Review Forum

were open to the public, and time was reserved to receive oral

comments from members of the public.in attendance. Both

proceedings were transcribed and, along with the comments

received, placed on the public record.”

Based on the record develoned during the Rule Review, as

well as the Commission’s iaw enforcement experience, the

Commission determined to retain the Rule but proposed to

amend it to better address recurring abuses and to reach

emerging problem areas.

D. The USA PATRIOT Act of 2001.

On October 25, 2001, the USA PATRIOT Act ©’ became

effective. This legislation contains provisions that have

significant impact on the TSR. Specifically, § 1011 of that

Act amends the Telemarketing Act to extend the coverage of

the TSR to reach not just telemarketing to induce the

purchase of goo¢s or services, but also charitable fundraising

conducted by for-profit telemarketers on behalf of charitable

organizations. Because enactment of the USA PATRIOT Act

took place after the comment period for the Rule Review

closed, the Commission did not raise issues relating to

charitable fundraising by telemarketers in the Rule Review.

Section 1011(b)(3) of the USA PATRIOT Act amends the

definition of “telemarketing” that appears in the Telemarket-

8 References to the Rule Review Forum transcript are cited as “RR Tr.”

followed by the appropriate page designation.

*? Relevant portions of the entire record of the Rule Review proceeding,

including all transcripts and comments, can be viewed on _ the

FTC’swebsite at http://www.ftc.gov/bcp/rulemaking/tsr/tsr-review.htm.

In addition, the full paper record is available in Room 130 at the FTC, 600

Pennsylvania Avenue, N.W., Washington, DC 20580, telephone number:

1-202-326-2222.

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ing Act, 15 U.S.C. § 6106(4), expanding it to cover any

“plan, program, or campaign which is conducted to induce

. . a charitable contribution, donation, or gift of money or

any other thing of value, by use of one or more telephones

and which involves more than one interstate telephone call

”

In addition, § 1011(b)(2), among other things, adds a new

section to the Telemarketing Act directing the Commission tc

include new requirements in the “abusive telemarketing acts

or practices” provisions of the TSR.*! Finally, § 1011(b)(1)

amends the “deceptive telemarketing acts or practices”

provision of the Telemarketing Act, 15 U.S.C. § 6102(a)(2),

by specifying that “fraudulent charitable solicitation” is to be

included as a deceptive practice under the TSR.

E. Notice of Proposed Rulemaking.

On January 30, 2002, the Commission published its

NPRM, proposing revisions to the TSR (“proposed Rule’) in

order to ensure that consumers receive the protections that the

Telemarketing Act mandated, and to effectuate § 1011 of the

USA PATRIOT Act.** The Commission proposed a number

of changes, including creating a national “do-not-call”

registry maintained by the FTC, a ban on receiving from or

disclosing to a third party a consuimer’s billing information, a

prohibition against blocking caller identification information,

3! Specifically, § 1011(b)(2)(d) mandates that the TSR include in its

regulation of abusive telemarketing acts and practices “a requirement that

any person engaged in telemarketing for the solicitation of charitable

contributions, donations, or gifts of money or any other thing of value,

shall promptly and clearly disclose to the person receiving the call that the

purpose of the call is to solicit charitable contributions, donations, or gifts,

and make such other disclosures as the Commission considers

appropriate, including the name and mailing address of the charitable

organization on behalf of which the solicitation is made.” Pub. L. 107-56

(Oct. 26, 2001).

3? 67 FR 4492 (Jan. 30, 2002).

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and a requirement that sellers or telemarketers accepting

payment via novel payment methods obtain the customer’s

express verifiable authorization. During the course of this

NPRM proceeding, the Commission received about 64,000

electronic and paper comments from representatives of

industry, law enforcement, consumer and privacy groups, and

from individual consumers.*> On June 5, 6 and 7, 2002, the

Commission held a forum (“June 2002 Forum’’) to discuss the

issues raised by commenters regarding the FTC’s proposed

revisions.** The forum was open to the public, and time was

reserved to receive oral comments from members of the

public in attendance. During the forum, the Commission

*3 Of these, more than forty-five were supplemental comments from

organizations and individuals, and about 15,000 supplemental comments

were from Gottschalks’ customers submitted by Gottschalks.

Simultaneous with, but separate from, the NPRM proceeding, the

Commission has been exploring possible methods for implementing the

proposed national “do-not-call” registry. On February 28, 2002, the

Commission published a Request for Information (“RFI”) that solicited

information from potential contractors on various aspects of implementing

the proposed registry. The RFI comment period closed on March 29,

2002. On August 2, 2002, the Commission issued a Request for Quotes to

selected vendors. Final proposals were submitted on September 20, 2002,

and are being evaluated by Commission staff. On May 29, 2002, the

Commission published a Notice of Proposed Rulemaking, soliciting

comments on a proposed amendment to the TSR that would establish the

methods by which fees for use of the registry would be set. 67 FR 37362

(May 29, 2002). The comment period ended June 28, 2002. The

proposed amendment received about forty comments (cited as “[Name of

Commenter]-User Fee at [page number]”), virtually all of which argued

that the Commission does not have the authority to issue a user fec, or that

it was premature to propose a user fee because the Commission did not

have sufficient information upon which to base the proposal. The user fee

proposal remains under review as the Commission continues to evaluate

the issues raised in the comments.

** Referer. -s to the June 2002 Forum transcript are cited as “June 2002

Tr.” followed by the appropriate day (I, II, or III, referring to June 5, 6, or

7, respectively) and page designation.

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announced that it would accept supplemental comments until

June 28, 2002.°° The forum proceeding was transcribed and

placed on the public record. The public record, including

many comments and all forum transcripts, has been placed on

the Commission’s website on the Internet.*°

Indivicual consumers generally favored the Commission’s

proposals, particularly with regard to a national “do-not-call”

registry. Consumer groups and state law enforcement

representatives also generally supported the proposed

amendments, although they expressed concern about the

effect of the proposal on state “do-not-call” and other laws.

Business and industry commenters generally opposed the

proposal, but suggested changes that they believed would

make the proposed amendments less burdensome on

legitimate busiaess while still achieving the desired consumer

protections. Comments from charitable organizations

focused primarily on the FTC proposal which would require

for-profit telemarketers who solicit on behalf of charitable

organizations to comply with the proposed “do-not-call”

registry. Charitable organizations consistently opposed such

“a requirement. The comments and the basis for the

Commission’s decision on the various recommendations are

analyzed in detail in Section II below.

F. The Amended Rule.

The Commission has carefully reviewed the entire record

developed in its rulemaking proceeding. The record, as well

as the Commission’s law enforcement experience, leave little

*> June 2002 Tr. II at 254. References to the supplemental comments

received are cited as “[Name of Commenter]-Supp. at [page number].”

website at http://www. ftc.gov/bep/rulemaking/tsr/tsr-review. htm. In

addition, the full paper record is available in Room 130 at the FTC, 600

Pennsylvania Avenue, N.W., Washington, DC 20580, telephone number:

1-202-326-2222.

doubt that important changes have occurred in the

marketplace, and that modifications to the original Rule are

necessary if consumers are to receive the protections that

Congress intended to provide when it enacted the Telemarket-

ing Act. Based on that record and on the Commission’s law

enforcement experience, the Commission has modified the

proposed Rule published in the NPRM and now promulgates

this amended Rule, as described in this SBP.

The Commission’s decision to retain certain provisions of

the original Rule while supplementing or amending others is

made pursuant to the Rule Review requirements of the

Telemarketing Act,?’ and pursuant to the rulemaking

authority granted to the Commission by that Act to protect

consumers from deceptive and abusive practices,** including

practices that may be coercive or abusive of the consumer’s

interest in protecting his or her privacy.”’ The Commission’s

decision to amend the original Rule also is made pursuant to

the authority granted to the Commission by § 1011 of the

USA PATRIOT Act.

As discussed in detail herein, tiic Commission believes that

it is necessary to amend the original Rule to ensure that the

Telemarketing Act’s goals are met—that is, encouraging the

growth of the legitimate telemarketing indusiry, while

curtailing those practices that are abusive or deceptive. The

record in this rulemaking proceeding demonstrates that many

of the changes in the marketplace that have occurred since the

original Rule was promulgated have led to the growth of

deceptive and abusive practices in areas not adequately

addressed by the original Rule. The amended Rule addresses

these practices by responding to the changes in the

marketplace in a manner consistent with the intent of

3715 U.S.C. 6108.

°° 15 U.S.C. 6102(a)(1) and (a)(3).

15 U.S.C. 6102(a)(3)(A).

173a

Congress in enacting the Telemarketing Act and § 1011 of the

USA PATRIOT Act. The Commission believes that the

amended Rule strikes a balance, maximizing consumer

protections without imposing unnecessary burdens on the

telemarketing industry. Each of the amendments is discussed

in detail in this SBP. A summary of the major changes from

the original Rule is set forth below. The amended Rule:

* Supplements the current company-specific “do-not-

call” provision with a provision that will empower a

consumer to stop calls from all companies within the

FTC’s jurisdiction by placing his or her telephone

number on a central “do-not-call” registry maintained by

the FTC, except when the consumer has an “established

business relationship” with the seller on whose behalf

the call is made;

* Permits consumers who have put their numbers on

the national “do-not-call” registry to provide permission

to call to any specific seller by an express written

agreement;

* Explicitly exempts solicitations to induce charitable

contributions via outbound telephone calls from

coverage under the national “do-not-call” registry

provision;

* Modifies § 310.3(a)(3) to require express verifiable

authorization for all transactions except when the

method of payment used is a credit card subject to

protections of the Truth in Lending Act and Regulation

Z, or a debit card subject to the protections of the

Electronic Fund Transfer Act and Regulation E;

* Modifies § 310.3(a)(3)(iii), the provision allowing a

telemarketer to obtain express verifiable authorization by

sending written confirmation of the transaction to the

consumer prior to submitting the consumer’s billing

information for payment;

174a

¢ Mandates disclosures in the sale of credit card loss

protection, and prohibits misrepresenting that a

consumer needs offered goods or services in order to

receive protections he or she already has under 15

U.S.C. § 1643 (limiting a cardholder’s liability for

unauthorized charges on a credit card account);

¢ Explicitly mandates that all required disclosures in §

310.3(a)(1) and § 310.4(d) be made truthfully;

* Expands upon the current prize promotion

disclosures to include a statement that any purchase or

payment will not increase a consumer’s chances of

winning;

* Prohibits disclosing or receiving, for consideration,

unencrypted consumer account numbers for use in

telemarketing, except when the disclosure or receipt is to

process a payment for goods or services or a charitable

contribution pursuant to a transaction;

¢ Prohibits causing billing information to be submitted

for payment, directly or indirectly, without the express

informed consent of the customer or donor;

* Sets out guidelines for what evidences express

informed consent in transactions involving preacquired

account information and “free-to-pay conversion”

features;

* Requires telemarketers to transmit the telephone

number, and name, when available, of the telemarketer

to any caller identification service;

¢ Prohibits telemarketers from abandoning any

outbound telephone call, and provides, in a safe harbor

provision, that to avoid liability under this provision, a

telemarketer must: abandon no more than three percent

of all calls answered by a person; allow the telephone to

ring for fifteen seconds or four rings; whenever a sales

175a

representative is unavailable within two seconds of a

person’s answering the call, play a recorded message

stating the name and telephone number of the seller on

whose behalf the call was placed; and maintain records

documenting compliance;

¢ Extends the applicability of most provisions of the

Rule to “upselling” transactions;

¢ Prohibits denying or interfering in any way with a

consumer’s right to be placed on a “do-not-call” list;

* Requires maintenance of records’ of express

informed consent and express agreement;

¢ Narrows certain exemptions of the Rule;

¢ Clarifies that facsimile transmissions, electronic

mail, and other similar methods of delivery are direct

mail for purposes of the direct mail exemption; and

¢ Modifies various provisions throughout the Rule to

effectuate expansion of the Rule’s coverage to include

charitable solicitations, pursuant to Section 1011 of the

USA PATRIOT Act, and adds new mandatory

disclosures and _ prohibited misrepresentations in

charitable solicitations.

G. Proposed Rule Adopted with Some Modifications.

Based on the entire record in this proceeding, the amended

Rule adopted by the Commission is substantially similar to

the proposed Rule. However, the amended Rule contains

some important differences from the proposed Rule. These

further modifications to the original Rule were based on the

recommendations of commenters and on the Commission’s

more comprehensive law enforcement experience in certain

areas over the months since publishing the NPRM.

The major differences between the proposed Rule and the

amended Rule adopted here are as follows:

176a

* The definition of “charitable contribution” no longer

contains exceptions for religious and political groups;

* Sellers who have an “established business

relationship” with the consumer are exempted from the

national “do-not-call” registry;

* For-profit telemarketers who solicit charitable

contributions are exempted from the national “do-not-

call” registry, but remain subject to the entity-specific

“do-not-call” provision;

* The original Rule’s definition of “outbound call” has

been reinstated, and the proposed Rule modified to

require specific disclosures in an upsell transaction;

* Disclosures regarding negative option features are

required;

* Express verifiable authorization is required for all

payments, except those made by a credit or debit card

subject to certain statutorily-mandated consumer

protections;

* For express oral authorization to be deemed

verifiable, a seller must ensure the customer’s or donor’s

receipt of the date the charge will be submitted for

payment (rather than the date of the payment) and

identify the account to be charged with sufficient

specificity such that the customer or donor understands

what account is being used to collect payment (rather

than provide the account name and number);

* The use of written post-sale confirmations is

permitted, subject to the requirement that such

confirmations be clearly and conspicuously labeled as

such; however, this method is not permitted in

transactions involving a “‘free-to-pay conversion” feature

and preacquired account information;

177a

* In charitable solicitations, the prohibited misrep-

resentation regarding the percentage or amount of any

charitable contribution that will go to a charitable

organization or program is no longer delimited by the

phrase “after any administrative or fundraising expenses

are deducted;”

* The Rule now specifies that billing charges to a

consumer’s account without the | consumer’s

authorization is an abusive practice and a Rule violation;

and the Rule now requires that a customer’s express

informed consent be provided in every transaction;

* The ban on the transfer of consumers’ billing

information has been replaced with a ban on transferring

unencrypted consumer account numbers;

* The failure to transmit caller identification

information is prohibited, rather than the affirmative

blocking of such information;

* Abandoned calls are prohibited, subject to a “safe

harbor” that requires a telemarketer to: abandon no more

than three percent of all calls answered by a person;

allow the telephone to ring for fifteen seconds or four

rings; whenever a sales representative is unavailable

within two seconds of a person’s answering the call, play

a recorded message stating the name and telephone

number of the seller on whose behalf the call was

placed; and maintain records documenting compliance;

* Records of express informed consent or express

agreement must be maintained;

* The exemptions for certain kinds of calls are

explicitly unavailable to upselling transactions;

* The exemption for — business-to-business

telemarketing is once again available to telemarketing of

178a

Web services and Internet services, as well as the

solicitation of charitable contributions.

Il. Discussion of the Amended Rule

The amendments to the Rule do not alter § 310.7 (Actions

by States and Private Persons), or § 310.8 (Severability),

although § 310.8 (Severability) has been renumbered as §

310.9 in the amended Rule. Section 310.8 of the amended

Rule is now reserved. a

A. Section 310.1—Scope of Regulations.

Section 310.1 of the amended Rule states that “this part [of _

the CFR] implements the [Telemarketing Act], as amended,”

reflecting the amendment of the Telemarketing Act by § 1011

of the USA PATRIOT Act.“” This section discusses

comments received regarding the implementation of the USA

PATRIOT Act amendments as well as other issues relating to

the scope of coverage of the TSR.

Effect of the USA PATRIOT Act.

As noted in the NPRM, § 1011(b)(3) of the USA

PATRIOT Act amends the definition of “telemarketing” that

appears in the Telemarketing Act, 15 U.S.C. § 6306(4), by

inserting the underscored language:

The term ‘telemarketing’ means a plan, program, or

campaign which is conducted to induce purchases of

goods or services or a charitable contribution, donation,

or gift of money or any other thing of vaiue by use of

one or more telephones and which involv more than

one interstate telephone call. ...

In addition, § 1011(b)(2) adds a new section to the

Telemarketing Act requiring the Commission to include in

15 U.S.C. 6101-6108. The Telemarketing Act was amended by the

USA PATRIOT Act on October 25, 2001. Pub. L. 107-56 (Oct. 26,

2001).

179a

the “abusive telemarketing acts or practices” provisions of

the TSR:

a requirement that any person engaged in telemarketing

for the solicitation of charitable contributions, donations,

or gifts of money or any other thing of value, shall

promptly and clearly disclose to the person receiving the

call that the purpose of the call is to solicit charitable

contributions, donations, or gifts, and make such other

disclosures as the Commission considers appropriate,

including the name and mailing address of the charitable

organization on behalf of which the solicitation is made.

Finally, § 1011(b)(1) amends the “deceptive telemarketing

acts or practices” provision of the Telemarketing Act, 15

U.S.C. § 6102(a)(2), by inserting the underscored language:

The Commission shall include in such rules respecting

deceptive telemarketing acts or practices a definition of

deceptive telemarketing acts or practices which shall

include fraudulent charitable solicitations and which

may include acts or practices “/ entities or individuals

that assist or facilitate deceptive telemarketing, including

credit card laundering.

Notwithstanding the amendment of these provisions of the

Telemarketing Act, neither the text of § 1011 nor its

legislative history suggests that it amends § 6105(a) of the

| Telemarketing Act—the provision which incorporates the

jurisdictional limitations of the FTC Act into the Tele-

marketing Act and, accordingly, the TSR. Section 6105(a) of

the Act states:

ae eS

Except as otherwise provided in sections 6102(d) [with

respect to the Securities and Exchange Commission],

6102(e) [Commodity Futures Trading Commission],

6103 [state Attorney General actions], and 6104 [private

consumer actions] of this title, this chapter shall be

enforced by the Commission under the Federal Trade

180a

Commission Act (15 U.S.C. § 41 ef seq.). Conse-

quently, no activity which is outside of the jurisdiction of

that Act shall be affected by this chapter. (emphasis

added}.*"

One type of “activity which is outside the jurisdiction” of

the FTC Act, as interpreted by the Commission and federal

court decisions, is that conducted by non-profit entities.

Sections 4 and 5 of the FTC Act, by their terms, provide the

Commission with jurisdiction only over persons, partnerships,

or “corporations organized to carry on business for their own

profit or that of their members.” *

Reading the amendments to the Telemarketing Act

effectuated by § 1011 of the USA PATRIOT Act together

with the unchanged sections of the Telemarketing Act

*' Section 6105(b) reinforces the point made in § 6105(a), as follows:

“The Commission shall prevent any person from violating a rule of

the Commission under section 6102 of this title in the same manner,

by the same means, and with the same jurisdiction, powers, and

duties as though all applicable terms and provisions of the Federal

Trade Commission Act (15 U.S.C. § 41 et seq.) were incorporated

into and made a part of this chapter. Any person who violates such

rule shall be subject to the penalties and entitled to the same

privileges and immunities provided in the Federal Trade

Commission Act in the same manner, by the same means, and with

the same jurisdiction, power, and duties as though all applicable

terms and provisions of the Federal Trade Commission Act were

incorporated into and made a part of this chapter.” (emphasis

added).

*" Section 5(a)(2) of the FTC Act states: “The Commission is hereby

empowered and directed to prevent persons, partnerships, or corporations .

. . from using unfair or deceptive acts or practices in or affecting

commerce.” 15 U.S.C. 45(a)(2). Section 4 of the Act defines

“corporation” to include: “any company, trust, so-called Massachusetts

trust, or association, incorporated or unincorporated, which is organized to

carry on business for its own profit or that of its members... .” 15 U.S.C.

44 (emph«..is added).

18la

compels the conclusion that for-profit entities that solicit

charitable donations now must comply with the TSR,

although the Rule’s applicability to charitable organizations

themselves is unaffected.*? The USA PATRIOT Act brings

the Telemarketing Act’s jurisdiction over charitable

solicitations in line with the jurisdiction of the Commission

under the FTC Act by expanding the Rule’s coverage to

include not only the sale of goods or services, but also

charitable solicitations by for-profit entities on behalf of

nonprofit organizations.

The Commission received numerous comments regarding

the change in scope to the TSR required by the USA

PATRIOT Act amendments of the Telemarketing Act. Some

comments supported the Commission’s interpretation of the

USA PATRIOT Act amendments, and the coverage of fur-

profit telemarketers who solicit on behalf of exempt

charitable organizations.“ However, ihe majority of

** A fundamental tenet of statutory construction is that “a statute should

be read as a whole, . . . [and that] provisions introduced by the amendatory

act should be read together with the provisions of the original section that

were... left unchanged . . . as if they had been originally enacted as one

section.” 1A NORMAN J. SINGER, SUTHERLAND STATUTES & STAT.

CONSTR. § 22:34 (6th ed. 2002), citing, inter alia, Brothers v. First

Leasing, 724 F.2d 789 (9th Cir. 1984); Republic Steel Corp. v. Costle, 581

F.2d 1228 (6th Cir. 1978); Am. Airlines, Inc. v. Remis Indus., Inc., 494

F.2d 196 (2d Cir. 1974); Kirchner v. Kansas Tpk. Auth., 336 F.2d 222

(10th Cir. 1964); Nat’l Ctr. for Preservation Law v. Landricu, 496 F.

Supp. 716 (D.S.C. 1980); Conoco, Inc. v. Hodel, 626 F. Supp. 287 (D.

Del. 1986); Palardy v. Horner, 711 F. Supp. 667 (D. Mass. 1989). Thus,

in construing a statute and its amendments, “{e]ffect is to be given to each

part, and they are to be int erpreted so that they do not conflict.” /d.

* See, e.g., AARP-NPRM at 4; AFP-NPRM at 3 (arguing that the USA

PATRIOT Act gives the FTC jurisdiction over for-profit telemarketers

soliciting on behalf of non-profits, agreeing that the disclosures required

by amended Rule § 310.4(e) are necessary, and noting that the disclosures

mirror the disclosures required by AFP’s code of ethics); ASTA-NPRM

at 1; Make-a-Wish-NPRM, passim; MBNA-NPRM at 6 (the Rule

182a

commenters who addressed this issue believed the

Commission had misinterpreted ‘he mandate of the USA

PATRIOT Act amendments. Law enforcement agencies and

consumer groups, including NAAG and NASCO, generally

expressed the view that tiie Commission had underestimated

the jurisdictional powers conferred on it by the USA

PATRIOT Act amendments, and urged that the Rule apply

not only to for-profit solicitors who call on behalf of charities,

but also to the charities themselves.*° These commenters

argued that the language of the USA PATRIOT Act and its

legislative history do not support limiting the applicability of

the TSR to telemarketers who call on behalf of non-profits,

rather than extending it to cover charitable organizations

as well.*°

On the other hand, most non-profit organizations that

commented argued that the Commission’s interpretation of

the USA PATRIOT Act amendments was too expansive.

Several of these commenters argued that in adopting § 1011

of the USA PATRIOT Act, “Congress meant only to apply

certain disclosure requirements—and not the other aspects of

the Rule—to professional fundraisers for charities and to for-

profit entities soliciting charitable contributions for their own

philanthropic purposes.” *’ Others suggested that “Congress

amendments to effectuate the USA PATRIOT Act’s provisions “reflect

Congress’ intent and are limited in scope and impact while providing

important consumer benefits.”).

*° See, e.g., NAAG-NPRM at 50-51; NASCO-NPRM at 3-4.

*° See NAAG-NPRM at 50-51; NASCO-NPRM at 3-4 (the USA

PATRIOT Act refers to “fraudulent charitable solicitations,” and requires

disclosures by “any person” engaged in telemarketing; also noting that the

USA PATRIOT Act was passed in the wake of September 11, 2001, and

in response to misrepresentations by non-profits as well as their for-profit

telemarketers.).

*7 DMA-NonProfit-NPRM at 4. See also ACE-NPRM at 1-2; ERA-

NPRM at 45; IUPA-NPRM at 21-22.

1834

intended only to address bogus charitable solicitation where

the non-profit or charitable cause or organizational scheme

itself is of a criminal or fraudulent nature.” “* These

commenters cite statements made by the legislation’s chief

sponsor to the effect that concerns about fraudulent charities

prompted him to introduce the legislation.”

The Commission believes that concerns about bogus

charitable fundraising in the wake of the events of September

11, 2001, in large measure propelled passage of § 1011 of the

USA PATRIOT Act.’ But the fact remains that Congress

did more than impose upon the solicitation of charitable

contributions by for-profit telemarketers prohibittions

agait'st misrepresentation and basic disclosure obligations.

Indeed, the USA PATRIOT Act amendments alter the

scope of the entire TSR by altering the key definition

of the statute—‘telemarketing”—to encompass charitable

solicitation. Moreover, the text of § 1011 expressly directs

the Commission to address both deceptive and abusive acts or

“8 Not-For-Profit Coalition-NPRM at 26. See also Community Safety-

NPRM at 2.

See Not-For-Profit Coalition-NPRM at 27-28; DMA-NonProfit-

NPRM at 5.

°° See letter dated June 14, 2002, from Senator Mitch McConnell to

FTC Chairman Timothy Muris, commenting on the NPRM and stating:

“In an effort to protect generous citizens and the charitable

institutions they support, | was proud to introduce the Crimes

Against Charitable Americans Act and secure its inclusion in the

USA PATRIOT Act. This legislation strengthens federal laws

regulating charitable phone solicitations. The bill also takes

important steps to combat deceptive charitable solicitations by

requiring telemarketers to make common sense disclosures such as

the charity’s identity and address at the beginning of the phone cali.

... When Congress enacted this legislation, it did not envision, nor

did it call for, the FTC to propose a federal “do-not-call” list, and

certainly not a list that applied to charitable organizations or their

authorized agents.”

AA Rober er She ARE et A

“4

184a

practices.°' Thus, there is no textual support for the notion

that § 1011 excludes from its grant of authority over

charitable solicitations the power to prohibit deceptive or

abusive practices.”

Some non-profit commenters also argued that the

Commission’s interpretation of the USA PATRIOT Act

produced, in effect, a double standard, regulating cha;ities

who outsource their telemarketing, but not those who conduct

their own telemarketing campaigns.°° Others opined that this

bifurcated regulatory scheme was not intended by Congress

when it passed the USA PATRIOT Act amendments to the

Telemarketing Act.°* These commenters argued that this

distinction penalizes charities (by subjecting them to

regulation) merely because they choose to outsource an

administrative function. Some argued further that the

increased costs of regulatory compliaiice will net be borne by

the for-profit telemarketers, but rather by charities

themselves, negatively impacting their ability to carry out

their primary mission.”

Again, the Commission notes that despite its broad

mandate to regulaie charitable solicitations made via

telemarketing, the USA PATRIOT Act amendments did not

expand the Commission’s jurisdiction under the TSR te make

*! Pub. L. 107-56 (Oct. 26, 2001).

*? it is a tenet of statutory construction that “an amendatory act is not to

be construed to change the original act . . . further than expressly declared

or necessarily implied.” SUTHERLAND STAT. CONSTR., note 43 above, at §

22:30 (citations omitted). The Commission believes the necessary

implication of mouifying the definition of “telemarketing” in the USA

PATRIOT Act is to have all provisions of the Rule apply to charitable

solicitations.

*3 See, e.g., March of Dimes NPRM at 2.

*4 See IUPA-NPRM at I.

°5 See Reese-NPRM at 2.

185a

direct regulation of non-profit organizations possible.

Nevertheless, reading the amendatory act together with the

original language, as it must, the Commission has sought to

give full effect to the -‘-ective of Congress set forth in the

USA PATRIOT Act amendments.

Another argument raised by large numbers of non-profit

couimenters is that regulating for-profit telemarketers who

solicit on behalf of non-profits, and in particular subjecting

them to the requirements of the “do-not-call” registry

provision, is unfair given the other limitations on the

Commission’s jurisdiction.°° These commenters suggested

that the result of this scheme would be to allow commezcial

calls that consuimers find intrusive, while banning calls from

charities, even those with whom a donor has a past

relationship.’’ As explained in greater detail in the discussion_

of the applicability of the ‘“do-not-call” provisions to

charitable solicitation telemarketing, careful consideration of

this argument has led the Commission to exempt solicitations

to induce charitable contributions via outbound telephone

calls from the “do-not-call” registry provision. Only the less

restrictive entity-specific “do-not-call” provision included in

the original Rule will app!y to charitable solicitation

telemarketing. However, both the entity-specific “do-not-

call” provisions and the “do-not-call” registry provisions

apply to commercial telemarketing to induce purchases of

goods or services. This approach fulfills the Commission’s

intention that the TSR be consistent with First Amendment

principles, whereby a higher degree of protection is extended

to charitable solicitation than to commercial solicitation.

Police-NPRM at 1; Lautman-NPRM at 2; Leukemia Society-NPRM at I-

2; NCLF-NPRM at 1; Angel Food-NPRM at 1; North Carolina FFA-

NPRM at 1; SO-CT-NPRM at 1; SO-NJ-NPRM at 1; SO-WA-NPRM at

1; Reese-NPRM at 2; SHARE-NPRM at 3; Stage Door-NPRM at I.

*” See, e.g., PAF-NPRM at 1; AOP-Supp. at 1; Chesapeake-Supp. at 1.

186a

Moreover, as a practical matter, the Commission believes that

this approach will enable charities to continue soliciting

support and pursuing their missions.

Commenters’ Proposals.

Noting the Commission’s jurisdictional limitations with

respect to banks, MBNA requested that the Rule explicitly

state that it is “inapplicable to entities exempt from coverage

under § 5(a)(2) of the [FTC Act].”°* MBNA also recom-

mended that the Rule extend this exemption to “entities

acting on behalf of banks . . . because such entities are

regulated by the Bank Service Company Act, 15 U.S.C.

§ 45(a)(2), concerning services they provide for banks.” ”

MasterCard challenged the Commission’s statement that it

can regulate third-party telemarketers who call on behalf of a

bank, and urged that the Commission explicitly exempt “any

bank subsidiary or affiliate performing services on behalf of a

bank.©’ ABA recommended that the amended Rule clarify

that “non-bank operating subsidiaries of banks as defined by

the banking agencies” are exempt.”

The Commission notes that, from the inception of the Rule,

the Commission has asserted that parties acting on behalf of

exempt organizations are not thereby exempt from the FTC

Act, and thus, for example, “a nonbank company that

contracts with a bank to provide telemarketing services on

behalf of the bank is covered” by this Rule.” This reading is

‘8 MBNA-NPRM at 2. Accord Fleet-NPRM at 2 (arguing that the

Office of the Comptroller of the Currency already provides significant

guidance to banks on managing ris”s that may arise from their business

relationships with third parties); AFSA-NPRM at 3.

59 MBNA-NPRM at 2. See also AFSA-NPRM at 3.

60 MasterCard-NPRM at 13-14. Accord Citigroup-NPRM at 11.

6! ABA-NPRM 4 3.

6 60 FR at 43843, citing, inter alia Official Airline Guides v. FTC,

630 F.2d 920 (2d Cir. 1980) (holding that the air carrier exemption from

Ry TTS PO AE INT OPS SY

why

ieee

rts ae uscd

187a

consistent with the Commission’s long-standing _ inter-

pretation of the scope of its authority under the FTC Act, as

well as with judicial precedent.” Furthermore, the

Commission’s authority was clarified in § 133 of the Gramm-

Leach-Bliley Act (“GLBA”), which states that “[a]ny person

that . . . is controlled directly or indirectly ... by. . . any bank

_. . ({as] defined in section 3 of the Federal Deposit Insurance

Act) and is not itself a bank . . . shall not be deemed to be a

bank . . . for purposes of any provisions applied by” the FTC

under the FTC Act.™ Most recently, a federal district court

held that, under this language, the Rule applies to tele-

marketing by a mortgage subsidiary of a national bank. /\s

the court stated, “the definition of ‘bank’ identified by Con-

gress simply does not include the subsidiaries of banks.”

The Commission believes it is unnecessary to state in the

Rule what is already plain in the Telemarketing Act, i.e., that

its jurisdiction for purposes of the TSR is conterminous with

its jurisdiction under the FTC Act, and therefore declines to

include an express statement of this fact in the Rule. Further,

the Commission declines to adopt the interpretation of some

commenters that the FTC Act itself exempts non-bank entities

the FTC Act did not apply to a firm publishing schedules and fares for air

carriers, which was not itself an air carrier); FTC/Direct Mktg. Ass’n.,

Complying with the Telemarketing Sales Rule (Apr. 1996) (“TSR

Compliance Guide’”’) at 7.

% See, e.g., Official Airline Guides, note 62 above; FTC v. Saja, 1997-2

CCH (Trade Cas.) P 71,952 (D. Ariz. 1997); FTC v. Am. Standard Credit

Sys., Inc., 874 F. Supp. 1080 (1994).

6 GLBA, Pub. L. 106-102, 113 Stat. 1383, Title I, § 133(a), 15 U.S.C.

6801-6810 (2001).

65 Minnesota v. Fleet Mortgage Co rp., 181 F. Supp. 2d 995 (D. Minn.

2001) (noting that the applicable definition under the Federal Deposit

Insurance Act (“FDIA”) is “any national bank, State bank, District Bank,

and any Federal branch and insured branch” citing FDIA, 12 U.S.C.

1813(a)(1)(A)).

188a

based on their affiliation with or provision of services to

exempt banks, and the reco’ mendations of those commenters

who sought an exemption .rom the Rule for bank subsidiaries

or agents. To do so would be contrary to the Commission’s

interpretation of its jurisdictional boundaries, and would

unnecessarily limit the reach of the Rule.

In a similar argument, SBC asserted that, contrary to the

Commission’s stated position, the Commission’s lack of

jurisdiction over common carriers engaged in common

carriage activity extends to their affiliates and their agents

engagec in telemarkeiing on their behalf.°’ SBC cites no

authority for this proposition, and the Commission is aware of

none. SBC claims that the cases cited by the Commission in

the NPRM ® in support of its authority provide no support for

Commission jurisdiction over a common carrier’s agent

assisting in selling common carrier services.” In fact, in one

-of those cases, the publisher of what the court described as

“the primary market tool of . . . virtually every (air) carrier

... in the United States” was held not to be exempt under the

exemption for air carriers.’” Accordingly, the Commission

declines to revise its position.

Citigroup requested that the amended Rule clarify that

certain financial services providers, such as insurance

underwriters and registered broker-dealers, are exempt from

°° This approach is consistent with that laid out in the SBP of the

original Rule. See 60 FR at 43483.

°? SBC-NPRM at 2, 4-5.

°° 67 FR at 4407 (citing 60 FR at 43843, citing FTC v. Miller, 549 F.2d

452 (7th Cir. 1977) and Official Airline Guides), see note 62 above.

°° SBC-NPRM at 4-5.

” Official Airline Guides, see note 62 above. See also cases cited

above in note 63, rejecting exemption claims of telemarketers for exempt

organizations.

189a

the Rule.’ NAIFA requested similar clarification regarding

insurance companies, as well as an explicit statement of

exemption in the Rule.’”* The Commission believes that the

explicit statement of the Commission’s jurisdictional

limitation over broker-dealers is abundantly clear in the

Telemarketing Act itself: ” thus, it is unnecessary to exempt

them in the Rule. Similarly, the Commission believes its

jurisdictional limitations regarding the business of insurance

are clear, and thus no express exemption for these entities is

necessary.“

In contrast to these requests to circumscribe or restate the

Commission’s jurisdiction under the Rule, a number of

commenters urged the expansion of the Rule’s scope beyond

its current boundaries. As NCL put it, “[b]ecause the

Commission’s general jurisdiction does not include

significant segments of the telemarketing industry, such as

‘ common carriers and financial institutions, the Rule does not

provide comprehensive protection for consumers or a level

playing field for marketers.” Others argued that the

Commission should assert jurisdiction over intrastate calls as

well as interstate calls.’°

CRs Pirate Lt AGC aie Se

As the Commission stated in the NPRM, “the jurisdictional

reach of the Rule is set by statute, and the Commission has no

authority to expand the Rule beyond those statutory limits.” ””

SS Rae ee Pe

”' See Citigroup-NPRM at 10.

” See NAIFA-NPRM at 1-2.

® 15 U.S.C. 6102(d)(2).

“* See Section 2 of the McCarran-Ferguson Act, 15 U.S.C. 1012(b) (the

business of insurance, to the extent that it is regulated by state law, is

exempt from the Commission’s jurisdiction pursuant to the FTC Act).

NCL-NPRM at 2. See also Horick-NPRM at 1; PRC-NPRM at 3-4:

Myrick-NPRM at 1.

7° ECA-NPRM at 2.

” 67 FR at 4497.

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Thus, absent amendments to the FTC Act or the Tele-

marketing Act, the Commission is limited with regard to its

ability to regulate under the Rule those entities explicitly

exempt from the FTC Act. Despite this limitation, the

Commission can reach telemarketing activity conducted by

non-exempt entities on behalf of exempt entities.” Therefore,

when an exempt financial institution, telephone company, or

non-profit entity conducts its telemarketing campaign using a

third-party telemarketer not exempt from the Rule, then that

campaign is subject to the provisions of the TSR.”

Regarding the suggestion that the Commission regulate

intrastate telemarketing calls, the Commission notes that,

pursuant to the definition of “telemarketing” included in the

Telemarketing Act, 15 U.S.C. § 6106(4), the Commission

only has authority to regulate “a plan, program, or campaign

which is conducted . . . by use of one or more telephones and

which involves more than one interstate call.” (emphasis

added).

Finally, one commenter suggested that the Commission

expressly state its jurisdiction over prerecorded telephone

solicitations and facsimile advertisements.*’ The Commission

78 Id.

”? As the Commission stated when it promulgated the Rule, “(t]he Final

Rule does not include special provisions regarding exemptions of parties

acting on behalf of exempt organizations; where such a company would

be subject to the FTC Act, it would be subject to the Final Rule as well.”

60 FR at 43843. Although some commenters, such as SBC (SBC-NPRM

at 5-8) and Wells Fargo (Wells Fargo-NPRM at 2), took issue with this

proposition, the fact remains that the Telemarketing Act states merely that

“no activity which is outside the jurisdiction of that Act shall be affected

by this chapter.” 15 U.S.C. 6105(a). Thus, when an entity not exempt

from the FTC Act engages in telemarketing, that conduct falls within the

Commission’s jurisdiction under the TSR. /d.; TSR Compliance Guide

at 12.

80 See Worsham-NPRM at 6.

> ate

Sue ath teas

19la

believes that sales calls using pre-recorded messages may fall

within the Rule’s definition of “telemarketing,” provided the

call is not exempt and provided the call meets the other

criteria of “telemarketing.” Thus, a sales call using a

prerecorded message may be “tele-marketing” if it is part of a

plan, program, or campaign for the purpose of inducing the

purchase of goods or services or inducing a donation to a

charitable organization, is conducted by use of one or more

telephones, and involves more than one interstate call.

However, the fact that prerecorded sales calls may be

“telemarketing” does not affect the fact that such calls are

already prohibited, except with the consumer’s prior express

consent, under regulations promulgated by the FCC pursuant

to the TCPA.*' Similarly, FCC regulations already prohibit

unsolicited facsimile advertisements,” although facsimiles

also are a form of direct mail subject to the TSR. The

Commission notes in the discussion of § 310.6(b)(6) below

that it considers facsimiles to be a form of direct mail

solicitation. Thus, under § 310.6(b)(6), a seller using a

facsimile advertisement to induce calls from consumers may

not claim the direct mail exemption unless the facsimile

truthfully discloses the material information listed in §

310.3(a)(1) (or contains no material misrepresent-ation

regarding any item contained in § 310.3(d) if the solicitation

is for a charitable contribution).

B. Section 310.2—Definitions.

The amended Rule retains the following definitions from

the original Rule unchanged, apart from renumbering:

“acquirer,” “Attorney General,” “cardholder,” “Commission,”

“credit,” “credit card,” “credit card sales draft,” “credit card

5! 47 CFR 64.1200(a)(2).

82 47 CFR 64.1200(a)(3).

192a

” 83 ””. 84 “

system,” “customer, “investment opportunity, mer-

chant,” “merchant agreement,” “person,” “prize,” “prize pro-

motion,” “seller,” and “State.”

”

“ ” 6

Based on the record developed in this matter, the

Commission has determined to retain the following

definitions from the proposed Rule unchanged, apart from

renumbering: “caller identification service,’ “donor,”

“telemarketer,” *° and “telemarketing.” The amended Rule

83 VISA stated that the definition of “customer” is too broad,

encompassing not only “the person who is party to the telemarketing call

and who would be liable for the amount of a purchase as the contracting

party, but also would include any person who is liable under the terms of

the payment device.” VISA-NPRM at 7. Although the term “customer,”

defined to mean “any person who is or may be required to pay for goods

or services offered through telemarketing,” is broad in scope, the

Commission believes this breadth is necessary to effect the purposes of

the Rule. Further, the Commission believes that the term “customer,”

taken in context of the various Rule sections in which it is used, is not

confusing. Therefore, the Commission makes no change in the amended

Rule to the definition of “customer.”

** One commenter recommended that the Commission clarify that an

investment vehicle whose main attribute is that it provides tax benefits

would be considered an “investment opportunity” under the Rule.

Thayer-NPRM at 6. The Commission believes that such a tax-advantaged

investment would come under the present definition, which is predicated

on representations about “past, present, or future income, profit, or

appreciation.” The Commission believes that any such investment

opportunity would only result in a tax advantage because of its ability to

produce income or appreciation, regardless of whether that income is

positive (and tax-deferred or tax-exempt) or negative (resulting in

deductible losses). Thus, the Commission has retained the original

definition of “investment opportunity” in the amended Rule.

8° One commenter expressed concern that “a company that sells

telemarketing services to sellers, but does not maintain any calling

facilities itself, instead subcontracting the actual telephoning to

individuals” might not fall within the definition of “telemarketer.”

Patrick-NPRM at 2. The Commission disagrees, and believes that

regardless of whether an entity maintains a physical call center, it would

—_

193a

modifies the definitions put forth in the NPRM for the terms

“billing information,” “charitable contribution,” “material,”

and “outbound telephone call.” Finally, the amended Rule

adds five definitions that were not included in the NPRM

proposal. They are: “established business relationship,”

“free-to-pay conversion,” “negative option feature,”

“preacquired account information,” and “upselling.” -The

Commission discusses each of these definitions below, along

with the comments received regarding them, and the

Commission’s reasoning in making a final determination

regarding each of these definitions.*®°

§ 310.2(c) —Billing information

The proposed Rule included a definition of the term

“billing information,” which was used in_ proposed

§ 310.3(a)(3), the express verifiable authorization provision,

and proposed § 310.4(a)(5), the section that addressed

preacquired account telemarketing. Under the definition

proposed in the NPRM, the term “billing information”

encompassed “any data that provides access to a consumer’s

or donor’s account, such as a credit card, checking, savings,

or similar account, utility bill, mortgage loan account, or debit

card,” *”

The Commission received numerous comments regarding

this definition as it pertained to the express verifiable

authorization and preacquired account provisions of the

proposed Rule. The use of the term in the express verifiable

be a “telemarketer” for purposes of the Rule if “in connection with

telemarketing, [it] initiates or receives telephone calls to or from a

customer or donor.” Amended Rule § 310.2(bb).

authorization,” “Internet services,” and “Web services” have been deleted

from the amended Rule because they are no longer necessary in light of

certain substantive modifications in the amended Rule.

*” See proposed Rule § 310.2(c), and discussion, 67 FR at 4498-99,

194a

authorization provision drew less comment, perhaps because

that provision merely required that the customer or donor

receive such billing information if express verifiable

authorization of payment is to be deemed verifiable.”

Comments from consumer groups generally favored the

“billing information” definition, noting that the breadth of the

term would prove beneficial to consumers." AARP, for

example, stated that the definition, as employed in the

proposed preacquired account telemarketing provision, “is

broad enough so as not to leave any doubt in the mind of the

telemarketer regarding what can and cannot be shared.” -

Law enforcement representatives and some “onsumer groups

expressed their concern that, as broad as the definition might

seem, it should be further expanded to encompass encrypted

data, and other kinds of information that can allow access to a

consumer’s account.”' Industry commenters, on the other

‘8 As discussed below, in the section explaining the express verifiable

authorization provision (i.e., § 310.3(a)(3)), commenters’ concerns

regarding billing information in the express verifiable authorization

provision focused on the dangers of disclosure of consumers’ account

numbers.

*? See NCLC-NPRM at 13; LSAP-NPRM at 5 (approved of definition,

but also suggested changing “such as” to “including but not limited to”).

°° AARP-NPRM at 7.

*! Specifically, NAAG noted: “[T]he Gramm Leach Bliley Act

(“GLBA”) has resulted in the common use of reference numbers and

encrypted numbers to identify consumer accounts in preacquired account

teler arketing. These types of account access devices definitely should be

included in the list of examples. Failure to include encrypted numbers

within the scope of the Rule’s definition of ‘billing information’ would

render the Rule useless as a device to combat the ills of preacquired

account telemarketing.” NAAG-NPRM at 38. See also NACAA-NPRM

at 5-6 (“consider providing a non-exclusive list of such information, based

upon technologies in place today. Thus, name, account number, telephone

number, married and maiden names of parents, social security number,

passwords to accounts and PINs, and encrypted versions of this

information, with or without the encryption [key], should all be prohibited

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;

195a

hand, argued precisely the opposite, requesting that the

definition be narrowed and that it specifically exclude

encrypted data,” or other specified items unique to that

commenter’s business practices.”’ Instead, industry com-

menters recommended, “billing information” should be

limited to account information that “in and of itself, is

sufficient to effect a transaction” against a consumer’s

account.” Virtually all of these comments were made in the

from use in any trasaction but the immediate one in which the co nsumer

is engaged.”); NCLC-NPRM at 13.

” Citigroup-NPRM at 7-8; Household Auto-NPRM at 2 (“Although

the specific language of the propwsed definition does appear to be

consistent with the Commission’s Gi.BA interpretation, the explanation of

the term in the [NPRM] is broader and creates a conflict with the GLBA

interpretation . . . . To avoid such a conflict, we suggest that the

Commission clarify that the term . . . includes only account numbers and

specifically excludes encrypted account numbers.”). Accord ABIA-

NPRM at 2; Roundtable-NPRM at 8 (“The Roundtable is concerned that

this definition is so broad that it could be construed to restrict the sharing

of publicly available identifying information, such as a consumer’s name,

phone number and address.”). See also AFSA-NPRM at 11-12; Advanta-

NPRM at 3; ARDA-NPRM at 3; Assurant-NPRM at 3; Capital One-

NPRM at 8-9; Cendant-NPRM at 7; Citigroup-NPRM at 7; E-Commerce

Coalition-NPRM at 2; ERA-NPRM at 24; IBM-NPRM at 10; MPA-

NPRM at 23, n.23; MasterCard-NPRM at 8; Metris-NPRM at 7; VISA-

NPRM at 6.

8 See, e.g., Green Mountain-NPRM at 31 (“If the Commission intends

to adopt its proposal to amend the TSR to add a new Section 310.4(a)(5)

to ban the use of preacquired billing information obtained from third

parties, it should exempt names, addresses, electricity meter identifiers,

and electricity usage patterns from its definition of ‘billing information.””)

** IBM-NPRM at 10. ARDA argued that information that would fall

within the definition of “billing information”—such as a customer’s or

donor’s date of birth—may be collected during a call for purposes other

than to effect a charge. ARDA cited examples including “eligibility to

enter a contest or drawing” or “demographic purposes.” ARDA-NPRM at

3. ARDA then asserted that, while this information may not be gathered

during a call in which a billing occurs, or used for billing purposes in the

first instance, it could be passed along to other parties for marketing or

196a

context of the proposed Rule provision regarding preacquired

account telemarketing, which would have prohibitea the

disclosure or receipt of “billing information” except when

provided by the customer or donor to process payment.

As noted below in the discussions of amended Rule

§§ 310.4(a)(5) and (6), the Commission has tailored its

approach to preacquired account telemarketing, thereby

addressing many of the concerns raised by commenters on

both sides regarding the proposed definition of “billing

information.” The amended \Kule’s approach to preacquired

account telemarketing— vhick no longer focuses on the

sharing of “billing information” in anticipation of telemarket-

ing, but instead prohibits “[c]ausing billing information to be

submitted for payment, directly or indirectly, without the

express informed consent of the customer or donor’—

ubviates the concerns about the breadth of the term, and

whether it includes or excludes encrypted account numbers.””

other purposes. Id. While the Commission recognizes that information

like date of birth has marketing uses beyond access to consumer accounts

for billing purposes, the Commission finds it improbable at best that

collection or confirmation of date of birth, or similar piece of information,

as a proxy for consent to be charged for a purchase or donation would

satisfy the “express informed consent” requirements of amended Rule §

310.4(a)(6), discussed below.

*° During the Rule Review, industry argued the term was so broad it

might mean that sellers and telemarketers could not share customer names

and telephone numbers for use in telemarketing. See, e.g., Advanta-

NPRM at 3; Roundtable-NPRM at 8. Industry also argued that encrypted

data should not be included in the definition of “billing information,”

because such data by itseif does not allow a charge to be placed on a

consumer’s [account, and because sharing it is permitted by the GLBA.

See, e.g., Cendant-NPRM at 7; E-Commerce Coalition-NPRM at 2; MPA

at 23, n.23. These arguments have been addressed by the Commission’s

revised approach to preacquired account telemarketing, which focuses not

on the sharing of account information—except in the very limited area of

sale of unencrypted account numbers—but on the harm that results from

certain practices in preacquired account telemarketing, i.e., unauthorized

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However, the amended Rule includes a definition of

“preacquired account information,” which encompasses both

encrypted and unencrypted account information, to address

specificaliy the practice of preacquired account

telemarketing.”

Consequently, after consideration of the record in this

proceeding, and in light of the more focused approach to the

provisions in which the term is used, the Commission has

decided to retain the proposed definition of “billing

information,” with a minor modification. The definition now

encompasses “any data that enables any person to obtain

access to a customer’s or donor’s account, such as ¢ credit

card, checking, savings, share or similar account, utility bill,

mortgage loan account, or debit card.” (emphasis added).

The Commission believes that this syntactical modification,

substituting the phrase “that enables any person to obtain

access” for the phrase “that provides access,” inakes the

definition more precise and somewhat easier to understand.

The definition retains the broad scope of its predecessor in

order to capture the myriad ways a charge may be placed

against a consumer’s account,”’ yet has more limited effect in

the context of the approach adopted in the amended Rule to

address preacquired account telemarketing and express

verifiable authorization.

charges. Moreover, in those instances where there has been the strongest

history of abuse, sellers and telemarketers are required to obtain part or all

of the customer’s account number directly from the customer.

%® See amended Rule § 310.2(w), and related discussion below.

*” The record shows that a telemarketer or seller may provide anything

from complete account number to mother’s maiden name to initiate a

charge for a telemarketing transaction, depending on its relationship with

another seller, financial institution, or billing entity. See, e.g., Assurant-

NPRM at 4.

198a

§ 310.2(d) —Caller identification service

The definition of “caller identification service” comes into

play in § 310.4(a)(7) of the amenaed Rule, discussed below.

In the NPRM, the Commission proposed to define “caller

identification service” to mean “a service that allows a

telephone subscriber to have the telephone number, and,

where available, name of the calling party transmitted

contemporaneously with the telephone call, and displayed on

a device in or connected to the subscriber’s telephone.” As

the Commission explained in the NPRM, the Commission

intends the definition of “caller identification service” to be

sufficiently broad to encompass any existing or emerging

technology that provides for the transmission of calling party

information during the course of a telephone call.”* Those few

commenters who addressed the definition supported the

Commission’s proposal.” Therefore, the amended Rule

adopts § 310.2(d), the definition of “caller identification

service,” unchanged from the proposal.

§ 310.2(e) —Charitable contribution

The original Rule did not include a definition of “charitable

contribution” because originally the term “telemarketing” in

the Telemarketing Act, which determined the scope of the

TSR, was defined to reach telephone solicitations only for

the purpose of inducing sales of goods or services.'°° The

proposed Rule added a definition of the term “charitable

8 67 FR at 4499.

” See, e.g., EPKC-NPRM at 11; ARDA-NPRM at 4. ARDA suggested

that the definition be expanded to allow transmission of the name and

number of “any party whom the telephone subscriber may contact”

regarding being placed on the company’s “do-not-call” list. As noted in

the subsequent discussion of this provision, § 310.4(a)(7) of the amended

Rule permits telemarketers to substitute a customer service number on the

caller identification transmission.

100 15 U.S.C. 6106(4).

ee See wee

199a

contribution” because § 1011 of the USA PATRIOT Act

amended the Telemarketing Act to specify that “telemarket-

ing” now includes not only calls to induce purchases of goods

or services but also calls to induce “a charitable contribution,

donation, or gift of money or any other thing of value.” \*'

The Commission has determined that the term “charitable

contribution,” defined for the purposes of the Rule to mean

“any donation or gift of money or any other thing of value”

succinctly captures the meaning intended by Congress.

Therefore, the Commission has retained this definition from

the proposed Rule. It has, however, determined to modify the

proposed defi ‘tion to eliminate the exemptions included ‘n

the proposed Rule.

The proposed definition in the NPRM expressly excluded

donations or gifts of money or any other thing of value

solicited by or on behalf of “political clubs, committees, or

parties, or constituted religious organizations or groups

affiliated with and forming an integre’ part of the

organization where no part of the net income inures to the

direct benefit of any individual, and which has received a

declaration of current tax exempt status from the United

States government.” '” This proposed exemption drew strong

comment aid criticism. NASCO recommended that a

definition of “constituted religious organizations” be included

in the Rule to set clear boundaries for what kinds of groups

were intended to be included.’ Hudson Bay stated that

“establishing governmentally preferred groups, such as

religious organizations or political parties, and providing

them with superior access to the public, is in our opinion

unquestionably a violation of the Fourteenth Amendment’s

'! 15 U.S.C. 6106(4) (amended by § 1011(b)(3) of the USA PATRIOT

Act, Pub. L. 107-56 (Oct. 26, 2001)).

'? Proposed Rule § 310.2(f).

'° NASCO-NPRM at 6.

200a

guarantee of equal protection and of the First Amend-

ment.”"”* Similarly, DMA-Nonprofit stated “the Commission

has no authority to single out agents of religious

organizations for exemption . . . . [T]here is no language in

the [USA PATRIOT Act] that allows the Commission to

make this distinction.” '”°

Based on careful consideration of the record, the

Commission is persuaded that no exemptions based upon the

type of organization engaged in telemarketing are warranted,

and that all telemarketing (as defined in the Telemarketing

Act as amended by the USA PATRIOT Act) conducted by

any entity within its jurisdiction should be covered by the

TSR. This does not mean: that the Commission believes

political fundraising is within the scope of the Rule.'”° It

means only that the TSR applies to all calls that are part of

any “plan, program, or campaign” that is conducted by any

entity within the FTC’s jurisdiction, involving more than one

interstate telephone call for the purpose of inducing a

purchase of goods or services or a charitable contribution,

donation, or gift of money or any other thing cf value. Thus,

for example, if a for-profit telemarketer on behalf of a

(presumably non-profit) political club or constituted rei:gious

organization were to engage in a “plan, program, or

campaign” involving more than one interstate telephone call

'04 Hudson Bay-NPRM at 12.

'05 DMA-NonProfit-NPRM at 5-6. See also Not-for-Profit Coalition-

NPRM at 41.

'06 The USA PATRIOT Act is consistent with a basic common law

distinction between charities and political organizations. “Gifts or trusts

for political purposes or the attainment of political objectives generally

have been regarded as not charitable in nature. Also .. . a trust to promote

the success of a political party is not charitable in nature.” 15 Am. Jur. 2d

Charities § 60 (2002). In this regard, it is noteworthy that Congress

elsewhere has established a regulatory scheme applicable to political

fundraising. 2 U.S.C. § § 431-455.

MENS WEL, bale Bi tee

20la_

to induce a purchase of goods or services or a charitable

contribution, that activity would be within the scope of the

TSR. But if such a for-profit telemarketer on behalf of the

same client made calls that were not for the purpose of

inducing a purchase of goods or services or a charitable

contribution, those calls would not be within the scope of

the TSR.

Commenters also addressed the scope of the term “or any

thing of -value” in the definition of “charitable contribution”

in the proposed Rule, suggesting exemptions to limit this

definition. Red Cross urged the Commission to exempt blood

from the definition of “charitable contribution” because, it

argued, “blood donations are not ‘a thing of value’ in a

fiduciary sense.” '°’ Blood Centers agreed with this position,

arguing that while “the donor’s blood is of great value to the

recipient of the blood donation . . . the donor is not bein

asked to part with anything other than his or her time.” '°

Blood Centers also argued that donations of blood are of

grave importance to save lives, and so are distinguishable

from typical commercial and even charitable telemarketing

calls '’ Another argument raised by Blood Centers in support

cf its position that a blood donation should be excluded from

the definition of “charitable contribution” is that blood

donation programs are highly regulated by the Food and Drug

Administration (“FDA”).''° March of Dimes also requested

that volunteers’ time not be considered a “thing of value”

under the Rule, noting that their organization often uses the

telephone to contact volunteers who then solicit contributions

from their friends and neighbors.'"'

'©” Red Cross-NPRM at 3.

'°8 Blood Centers-NPRM at 2.

109 Td.

"1 Td. at 2-3.

''! March of Dimes-NPRM at 2. See also AFP-NPRM at 5.

202a

The Commission believes that the text of the USA

PATRIOT Act provision expanding the definition of

telemarketing to include calls to induce “a charitable

contribution, donation, or gift of money or any other thing of

value” is broad in scope and plain in meaning. The USA

PATRIOT Act specifically uses the term “or any other thing

of value” in addition to the terms “charitable contribution,

donation, or gift of money,” ensuring that it will encompass

non-money contributions. The Commission believes that,

while blood donors are asked for blood and not money, the

blood they donate is clearly a “thing of value.” ''? Similarly,

although volunteers are asked to give time rather than money,

the Commission believes that a donation of time is a “thing of

value.” ''® Therefore, the Commission cannot exempt from

the definition of “charitable contribution” either blood or time

volunteered. The Commission believes, however, that

legitimate concern about inclusion of blood in the definition

should be alleviated by the exemption of charitable

solicitation telemarketing from the “do-not-call” registry

provisions. The remaining provisions that will apply to

telemarketing to solicit blood donations are neither

burdensome nor likely to impede the mission of the non-

profit organizations that seek such donations.

NAAG and NASCO suggested that the Commission “state

that the word ‘charitable’ does not limit the character of the

recipient of the contribution.” ''* According to these

‘2 See Maryland Health Care, Fall 2000 at 4, http://www.

mdhospitals.org/MarylandPubs/ MDHIthCr—1100.pdf (noting the blood

shortages had driven up the price of blood from $145.24 per unit to

$174.10 per unit in a single year).

''> Presumably, organizations that rely on volunteers would, absent

their donations of time, be forced to pay labor costs associated with the

work done by volunteers. Therefore, the time donated is a “thing of

value,” equivalent to the labor cost saved.

''4 NAAG-NPRM at 52; NASCO-NPRM at 5-6.

203a

commenters, it is important to ensure that donations solicited

by or on behalf of public safety organizations are considered

“charitable contributions” for regulatory purposes, and that

those contributions solicited by sham charities are still

“charitable contributions” under the amended Rule.''> The

Commission believes that the current definition, which

closely tracks the USA PATRIOT Act definition, is clear as

to what is covered.''® Its focus is on the donation, rather than

the solicitor, and it is sufficiently broad in scope to

encompass donations solicited on behalf of any organization.

NAAG and NASCO also requested that the Commission

; explicitly address the situation where a call involves “‘percent

4 of purchase’ situations, where contributions are sought in the

form of the purchase of goods or services, [and] where a

portion of the price will, according to the solicitor, be

dedicated to a charitable cause.” ''’ These commenters urged

the Commission to ensure that such hybrid transactions are

covered, either as sales of goods or services or as charitable

contributions, or both, under the Rule.''® The Commission

, believes that when the transaction predom-inantly is an

‘ inducement to make a charitable contribution, such as when

an incentive of nominal value is offered in return for a

donation, the telemarketer should proceed as if the call were

5 exclusively to induce a charitable contribution. Similarly, if

the call is predominantly to induce the purchase of goods or

services, but, for example, some portion of the proceeds from

this sale will benefit a charitable organization, the

telemarketer should adhere to the portions of the Rule

: relevant to sellers of goods or services. The Commission

believes that further elaboration on the differences between

Ba ah H5, nee RNAS, Cy hehe Ni ON

115 Id.

''6 15 Am. Jur. 2d Charities § 60 (2002).

''7 NAAG-NPRM at 52. See also NASCO-NPRM at 5-6.

118

Id.

————————————— oe rr

204a

- these scenarios is unnecessary because, in either case, the

requirements are similar, consisting primarily of avoiding

misrepresentations, and promptly disclosing information that

would likely be disclosed in the ordinary course of a

telemarketing call.

§ 310.2(m)—Donor

The proposed Rule contained a definition of “donor” in

order to effectuate the goals of the USA PATRIOT Act

amendments. Under that definition, a “donor” is “any person

solicited to make a charitable contribution.” ''’ Throughout

the proposed Rule, wherever the word “customer” was used,

the Commission added the word “or donor” where

appropriate, to indicate that the provision was also applicable

to the solicitation of charitable contributions. The Commis-

sion received very few comments on this definition. The

March of Dimes expressed the concern that “[t]he definition

of a ‘donor’ does not accurately reflect the nomenclature used

by the industry.” '20 Rather, the March of Dimes suggested,

the term “donor,” as used in philanthropic circles, “connotes

an established relationship with the non-profit charitable

organization.” 21 The March of Dimes recommended

replacing the terms “customer” and “donor” in the Rule with

the term “consumer.”

The Commission believes that the term “consumer” is too

broad and non-specific to substitute for the terms “customer”

and “donor,” '?” The Rule uses these more targeted terms to

7 Proposed Rule § 310.2(m), 67 FR at 4540.

'20 March of Dimes-NPRM at 3.

'21 7d. (noting that the term “prospect” is used to mean a potential

donor).

22 The term “consumer” is defined generally as “one that utilizes

economic goods.” Merriam-Webster’s Collegiate Dictionary, at: http://

www.merriamwebster.com/cgi-bin/dictionary#. This broader term is used

in the Rule in the definition of “established business relationship,”

GPa RE a tae i aT EE reg ES eS

205a

capture the varied nature of transactions between sellers or

telemarketers and individuals who are, or may be, required to

pay for something as the result of a telemarketing solicitation.

Thus, it is the intent of the Commission that the term “donor”

as used in the Rule encompass not only those who have

agreed to make a charitable contribution, but also any person

who is solicited to do so, to be consistent with its use of the

term “customer.” Therefore, the Commission has determined

that the term “donor” is necessary and appro-priate, and has

retained the definition of “donor” in the amended Rule

without modification.

§ 310.2(n) —Established business relationship

The Commission has determined to add to the Rule a

definition of “established business relationship.” This new

definition comes into play in § 310.4(b)(1)(iii), which now

exempts from the national “do-not-call” registry calls from

sellers with whom the consumer has an “established business

relationship” (unless that consumer has asked to be placed on

that seller’s company-specific “do-not-call” list). This

definition limits the exemption to relationships formed by the

consumer’s purchase, rental, or lease of goods or services

from, or financial transaction with, the seller within eighteen

months of the telephone call (or, in the case of inquiries or

applications, within three months of the call).

Industry comments were nearly unanimous in emphasizing

that it is essential that sellers be able to call their existing

customers.'*’ Although the initial comments from consumer

§ 310.2(n), and in the provision banning the transfer of unencrypted

account numbers, § 310.4(a)(5). In each of these instances, the

Commission has consciously used the broader term “consumer” to effect

broader Rule coverage.

'23 See, e.g., AFSA-NPRM at 13-14; AmEx-NPRM at 3; ANA-NPRM

at 5; ARDA-NPRM at 17; ATA-NPRM at 29; BofA-NPRM at 4; Best

Buy-NPRM at 1; DialAmerica-NPRM at 12; DMA-NPRM at 33-34;

DSA-NPRM at 7-8; ERA-NPRM at 36-37; Gottschalks-NPRM at 1;

206a

groups opposed an exemption for “established business

relationships,” '** their statements during the June 2002

Forum and in their supplemental comments expressed the

view that such an exemption would be acceptable, as long as

it was narrowly-tailored and limited to current, ongoing

relationships.'*° Moreover, state law enforcement representa-

tives’ comments on their experience with state “do-not-call”

NCTA-NPRM at 6; NRF-NPRM at 13; PMA-NPRM at 28; Roundtable-

NPRM at 5; SITA-NPRM at 2-3; Time-NPRM at 6-7; VISA-NPRM at 3.

See also, e.g., ARDA-Supp. at 1; ICTA-Supp. at 2.

24 See, e.g., EPIC-NPRM at 20-21; NCL-NPRM at 10. Among other

things, consumer advocates opposed such an exerption because of the

difficulty in defining a “pre-existing business relationship” without

creating significant loopholes in the protections provided by the national

“do-not-call” registry (described in the discussion of amended Rule §

310.4(b)(1 (iii) below). See NCL-NPRM at 10. Furthermore, they did

not agree with industry’s argument that consumers want to hear from

companies with whom they have an existing relationship. NCL stated that

the fact that a consumer may have had a relationship with a company does

not necessarily mean that he or she wishes to receive calls, or to continue

to receive calls, from that company. NCL-NPRM at 10. Consumer

advocates believed the FTC had taken the right approach: the burden

should lie with the seller to show specific consent to receive calls. NCL-

NPRM at 10; EPIC-NPRM at 20-21; PRC-NPRM at 2.

125 June 2002 Tr. I at 110 (NCL) (“This would have to be . . . really

narrowly defined in order to protect consumers so that if somebody had

something that was ongoing . . . that would be in a different category.”).

See also AARP-Supp. at 3 (“AARP recognizes that there may be an

expectation by consumers that they will be in contact with businesses with

whom they have current, ongoing, voluntary relationship; calls from such

businesses are not necessarily unwanted or unsolicited. Calls made from

a business with which consumers had a prior relationship are a different

matter altogether. In situations where the consumer has chosen not to

continue a business relationship, it cannot be presumed they wish to be

solicited by that business again. Therefore, AARP believes that any

exemption for an existing business relationship must be limited to those

situations where the relationship is current, ongoing, voluntary, involves

an exchange of consideration, and has not been terminated by either

party.”).

ee PL ANY ae ES Bt SO PA

207a

laws that have an exeniption for “established business

relationships” suggest that this type of exemption is

consistent with consumer expectations.'*° While the

Commission is persuaded that an “established business

relationship” exemption is necessary and appropriate, it

believes that the exemption must be narrowly crafted and

clearly defined to avoid a potential loophole that could defeat

the purpose of the national “do-not-call” registry.

In adopting the “do-not-call” provisions of the original

Rule, the Commission considered, among other things, the

approach taken by Congress and the FCC in the TCPA and its

implementing regulations.'”’ In crafting an “established

business relationship” definition, it is useful again to consider

the TCPA, which specifically exempts calls “to any person

with whom the caller has an _ established business

relationship.” '“* The House Report on the TCPA’s

'26 June 2002 Tr. I at 110-19. See also June 2002 Tr. I at 119-22, in

which participants discussed an AARP survey conducted in conjunction

with the Missouri Attorney General’s Office, which showed that three-

fourths of consumers did not feel an established business relationship was

justified. However, representatives from the Missouri Attorney General’s

Office explained that the results were less a measure of consumer

condemnation of such an exemption, than an indication that consumers

were receiving calls from businesses with whom they did not perceive that

they had such a relationship. According to the Missouri representatives,

businesses took a broader view of the relationship than did consumers. As

noted in more detail below, consumers appear to be comfortable with an

exemption for “established business relationships” once its parameters are

explained to them.

'27 60 FR at 43855.

'8 47 U.S.C. 227(a)(3)(B). The legislative history of the TCPA shows

that Congress exempted “established business relationship” calls “so as

not to foreclose the capacity of businesses to place calls that build upon,

follow-up, or renew, within a reasonable period of time, what had once

been an existing customer relationship.” H.R. REP. NO. 102-317 at 13

(1991). Throughout the House Report discussing the exemption for

“established business relationship,” the point is stressed that the

208a

“established business relationship” exemption confirms that

Congress intended for the reasonable expectation of the

consumer to be the touchstone of the exemption:

In the Committee’s view, an “established business

relationship” also could be based upon any prior

transaction, negotiation, or inquiry between the called

party and the business entity that has occurred during a

reasonable period of time. . . . By requiring this type of

relationship, the Committee expects that otherwise

objecting consumers would be less annoyed and

surprised by this type of unsolicited call since the

-consumer would have a recently established interest in

the specific products or services. .. . In sum, the

Committee believes the test to be applied must be

grounded in the consumer’s expectation of receiving the

call.

When it promulgated its rules pursuant to the TCPA, the

FCC included the following definition of “established

business relationship” with regard to its company-specific

“do-not-call” requirements:

The term established business relationship means a prior

or existing relationship formed by a voluntary two-way

communication between a person or entity and a

residential subscriber with or without an exchange of

consideration, on the basis of an inquiry, application,

purchase or transaction by the residential subscriber

regarding products or services offered by such person or

exemption is intended io reach only those relationships that are current or

recent. The Report consistently refers to an “established business

relationship” in terms of “the existence of the relationship at the time of

the solicitation, or within a reasonable time prior to it.” Id. at 13-15.

(emphasis added).

'29 Td. at 14, 15.

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209a

entity, which relationship has not been previously

terminated by either party. °°

Consideration of state approaches to the “established

business relationship” exemption is also instructive. Most

state “do-not-call” laws have some form of exemption for

“established business relationships,” and several of these are

modeled on the language of the FCC’s exemption.’®|

However, there is an important difference between the FCC

approach and that of many of the states, in that many state

law exemptions circumscribe the scope of an “established

business relationship” by specifying the amount of time after

a particular event (like a purchase) during which such a

relationship may be deemed to exist.'*? The Commission

believes that this approach is more in keeping with consumer

expectations than an open-ended exemption. As discussed in

more detail below, many consumers favor an exemption for

companies with whom they have an established relationship.

Consumers also might reasonably expect sellers with whom

they have recently dealt to call them, and they may be willing

to accept these calls. A purchase from_a seller ten years ago,

however, would not likely be a basis for the consumer to

expect or welcome solicitation calls from that seller.

'3° 47 CFR 64.1200(f)(4).

'3! Fourteen state “do-not-call” statutes are open-ended and do not

contain a time limit for tolling the established business relationship:

Alabama, California, Connecticut, Florida, Georgia, Idaho, Kentucky,

Maine, Minnesota, Oregon, Texas, Vermont, Wisconsin, and Wyoming.

Three of these “open-ended” state statutes incorporate the FCC definition

either in whole or in part: California, Texas, and Wyoming. In addition,

four other states incorporate the FCC definition in whole or in part, but

limit the time period during which a business may claim an “established

business relationship” once the relationship has lapsed: Colorado, Kansas,

Oklahoma, and Pennsylvania. See note 592 below for citations to all state

“do-not-call” statutes.

'32 Soe discussion and note 135 below.

210a

In addition, specific time limits for an “established

business relationship” are particularly appropriate for a

general “do-not-call” registry such as the one to be

maintained by the Commission, as opposed to the company-

specific “do-not-call” lists for which the FCC definition was

crafted. The Commission believes that an “established

business relationship” exemption in a national list applying to

many sellers and telemarketers should be carefully and

narrowly crafted to ensure that appropriate companies are

covered while excluding those from whom consumers would

not expect to receive calls. A specific time limit balances the

privacy needs of consumers and the need of businesses to

contact their current customers.

Comments received in response to the NPRM stress the

importance of extending such an exemption to current,

existing relationships and prior relationships that occurred

within a reasonable period of time.'*? Throughout the

comments from industry stressing the need for an

“established business relationship” exemption, a consistent

theme is that such an exemption is necessary for “existing

customers” or someone with whom sellers “currently do

business,” and there seems to be a common understanding

'33 The comments received on “established business reiationship” came

primarily from the business community. On the other hand, there was

little comment from consumer advocates and state regulators on how such

an exemption would be tormulated because the proposed Rule did not

include an “established business relationship” exemption. However, the

NPRM did ask about the effect on companies and charitabic organizations

with whom consumers had a pre-existing business or philanthropic

relationship of the proposal to allow companies to call consumers on the

“do-not-call” registry if they had given their express verifiable

authorization to call (67 FR at 4539, question 9). As discussed in more

detail above in note 124, those few consumer advocates who did mention

such an exemption were opposed to it.

et. ton le tet oi

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2lla

regarding what constitutes an “existing” relationship. '** There

is less consensus when it comes to the issue of how long a

business relationship lasts following a transaction between a

seller and consumer. Many states have attempted to provide

some clarity regarding how long after dealings between a

consumer and seller have ceased that a residual “established

: business relationship” could be deemed still to exist.

Twelve of the states that have an “established business

relationship” exemption limit it to a specific time period after

a transaction has occurred, ranging from six months to 36

months. '*° Industry commenters suggested various time

periods to limit the exemption. Several suggested 24 to 36

months, while others stated that a shorter period (12 monihs)

would be more appropriate.'*° The Commission believes,

SS i et Na i i

4 See, e.g., ABA-NPRM at 10; Community Bankers-NPRM at 2;

AmEx-NPRM at 3; ANA-NPRM at 5; Associations-NPRM at 2; ARDA-

NPRM at 17; Bank One-NPRM at 4; BofA-NPRM at 4; Best Buy-NPRM

at 1; Cendant-NPRM at 5-6; Citigroup-NPRM at 4; Comcast-NPRM at 3;

CMC-NPRM at 6; Cox-NPRM at 2, 4; DMA-NPRM at 33, 34; Eagle

Bank-NPRM at 2; Roundtable-NPRM at 5; Gottschalks-NPRM at 1;

NCTA-NPRM at 4; NRF-NPRM at 13; SIIA-NPRM at 2-3; Time-NPRM

at 6; VISA-NPRM at 3.

'35 Six months (Louisiana, Missouri); 12 months (Pennsylvania,

Tennessee); 18 months (Colorado, Illinois); 24 months (Alaska,

Massachusetts, Oklahoma); 36 months (Arkansas, Kansas). In addition,

New York apparently has adopted an 18-month time period: the New

York statute does not contain a time limit; however, at the June 2002

Forum, NYSCPB stated that New York applies an 18-month time limit.

June 2002 Tr. I at 115 (“We have two separate exemptions. .. . The

second thing is a prior business relationship, which we define as an

exchange of goods and services for consideration within the preceding 18

months. .. .”). Indiana’s statute does not have an exemption for

“established business relationships.”

Industry commenters generally supported a 24-month time period,

but did not submit data that would tend to show that a shorter time period

would not serve their purposes. The breakdown of suggested time periods

is as follows: “recently terminated or lapsed” (New Orleans-NPRM at 14-

212a

based on the record evidence and statements from Congress

regarding the TCPA’s “established business relationship,”

that a company should be able to claim the exemption only if

there has been a relatively recent transaction between the

customer and the seller sufficient to support the existence of

an “established business relationship.”

Based on the comments, the Commission finds little

support for a 36-month time period. Most of the commenters

who suggested that time period did so as part of a joint

comment filed by five associations.'*’ In the comments the

individual associations filed separately, however, they

suggested a time period of 24 months.'*> NAA initially

suggested 24 months, but expanded that to 36 months in its

supplemental comment. Industry commenters who advocate

24 months provide little support for their assertion that it is

the appropriate length of time by which to measure

“reasonableness;” nor did they submit data that would show

that a shorter time period would not serve their purposes.

Other industry members (such as Bank of America,

Consumer Mortgage Coalition, and Federated Department

Stores) suggested shorter time periods. The Commission

does not believe that a relationship which terminated or

lapsed two years ago would constitute a relationship that had

recently terminated or lapsed. The Commission believes that

if consumers received a call from a company with whom the

15); 12 months (BofA-NPRM at 4; CMC-NPRM at 6-7); 24 months

(ATA-Supp. at 8; ERA-NPRM at 38; ERA-Supp. at 19; MPA-Supp. at

11; NAA-NPRM at 11; June 2002 Tr. I at 109 (PMA)); 36 months

(ARDA-NPRM at 20; Associations-Supp. at 3-4). In a supplement to

their comment, FDS supported limiting telemarketing sales calls to

customers who have made a purchase in the past 12 months, while

allowing strictly informational calls to persons who have had a transaction

within the past 36 months. Federated-Supp. at 1-2.

'37 See Associations-NPRM at 3-4.

138 Soe note 136 above.

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213a

most recent purchase, rental, lease or financial transaction

occurred or lapsed two years ago or longer, consumers would

likely be surprised by that call and find it to be unexpected.

The Commission believes that 18 months is an appropriate

time frame because it sirikes a balance between industry’s

needs- and consumers’ privacy rights and reasonable

expectations about who may call them and when. By

extending beyond a single annual sales cycle, the 18-month

period allows sufficient time for businesses to renew contact

with prospects who may only purchase once a year.

Moreover, limiting the “established business relationship” to

18 months from the date of the last purchase or transaction

would be at least as restrictive as the majority of states that

have such an exemption, thus achieving greater consistency

for both industry and consumers. The experience of states

that have an “established business relationship” exemption in

their “do-not-call” laws indicates that a relatively limited

“established business relationship” exemption does not

conflict with consumers’ expectations. At the June 2002

Forum, the representatives from New York and Missouri

spoke about consumer expectations in connection with their

states’ “do-not-call” lists.'°? Both noted that consumers

appeared to be comfortable with such an exemption because

they had received few complaints from consumers reg “din

companies with whom they had an established relationship.’

'39 Soe June 2002 Tr. I at 110-21.

'49 Td. at 118-19 (New York: “Well, [consumers are not unhappy], and

a Ict of times they complain, and you could say they’re [sic] prima facie

evidence they’re unhappy. We call them back and say, gee, did you have

a transaction with these folks? They claim you did on X, Y and Z, and

they furnished us this paperwork. And then they say, oh, yeah. They

don’t seem to be mad.”) (Missouri: “Most people when you call them

back are delighted that 70 to 80 percent of their phone calls have been

caused to not come in, so when we explain to them that you had a

relationship or you explain to them that scme of these calls are exempt,

they understand when you explain that to them, and they’re delighted,

214a

The states’ experience is not contradicted by the comments of

individual consumers in response to a specific question

included on the Commission’s website inviting email

comments from the public. Although 60 percent of

consumers who responded to this question stated that they

opposed an exemption for “established business relationship,”

40 percent favored such an exemption.’*'

Furthermore, a study conducted in 2002 by the Information

Policy Institute found that consumers preferred a “nuanced

approach” to the “do-not-call” issue, wanting to limit some

calls to their household, but not all calls.'*” According to the

study, 50 percent of consumers surveyed supported

regulations that would allow local or community-based

organizations to call during specific hours of the day.'®

Furthermore, slightly less than half of the respondents

supported legislation that would allow calls, but only from

local or community-based organizations with whom they

have an existing relationship.'“* The survey showed that

consumers were less likely to welcome calls from national

companies, although 40 percent indicated that they would

because our anecdotal information shows that 70 to 80 percent of the calls

people had been receiving, they’re not receiving now.’’).

‘4! Analysis of consumer email comments in the Commission’s TSR

comment database indicates that about 860 favored an exemption for calls

from firms with whom they already have an established relationship,

while about 1,080 opposed such an exemption. Furthermore, over 13,000

of the 14,971 comments submitted by Gottschalks’ customers supported

allowing Gottschalks to call them even if they signed up on a “do-not-

call” registry to block other calls.

' Michael A. Turner, “Consumers, Citizens, Charity and Content:

Attitudes Toward Teleservices” (Information Policy Institute, June 2002)

at 4, 8 (hereinafter “Turner study’’).

143 Id.

BER NC is NVR BBE NM SAN HE eae

215a

allow calls from national organizations with whom they had

an existing relationship. '*°

In sum, consumers are split over whether they favor an

“established business relationship” exemption. Given the

difference of opinion among consumers, and _ industry’s

convincing arguments regarding the detrimental effects the

lack of an exemption would cause, the Commission is

persuaded to provide an exemption for “established business

relationships.”

The definition of “established business reiationship” in the

amended Rule would limit the exemption in the case of

inquiries and applications to three months after the date of the

application or inquiry (except with the consumer’s express

consent or permission to continue the relationship). The

Commission believes that a consumer’s reasonable

expectations are different in the case of inquiries and

applications as compared to purchase, rental, and lease

transactions. A simple inquiry or application would reason-

ably lead to an expectation of a prompt follow-up telephone

contact close in time to the initial inquiry or application, not

one after an extended period of time. Comments from

NYSCPB at the June 2002 Forum also warned of possible

abuse in the creation of an “established business relationship”

based on inquiries from consumers.'*° The Commission

145 Id.

st [146]: June 2002 Tr. I at 116 (NYSCPB) (“{[D]oes a mere inquiry

constitute a business relationship? And our answer to that is no, because

we have had some what I would say are really sleazy operators. They will

call up and leave a message on your phone. They won’t even identify

who they are. They will simply say ‘Call us back, it’s very important.’

You call back out of curiosity or whatever, okay, and then all of a sudden

they feel free to bombard you for the next few years with calls.”), The

Commission intends that such a practice would not entitle a seller or

telemarketer to make calls to consumers by claiming to have an

“established business relationship.”

21l6a

believes three months should be a sufficient time frame in

which to respond to a consumer’s inquiry or application.

The amended Rule allows for an 18-month time limit

where there has been a purchase, rental or lease, or other

financial transaction between the customer and seller. The

18-month time limit for an “established business relationship”

based on a purchase, lease, rental, or financial transaction

runs from the date of the last payment or transaction, not from

the first payment. In instances where consumers pay in

advance for future services (e.g., purchase a two-year

magazine subscription or health club membership), the seller

may claim the exemption for 18 months from the last

payment or shipment of the product. For such ongoing

relationships, it makes little difference to likely consumer

expectations whether the purchase was financed over time or

paid for up front. Sellers who provide products or services

where the consumer is required to pay in advance can also get

the consumer’s express agreement to call, as provided in

§ 310.4(b)(1 )(i11)(B)(1).

Several financial services industry commenters urged that

any “established business relationship” exemption should

encompass all affiliates of a seller.’ ’ These commenters

noted that regulatory requirements often dictate the corporate

structure of financial institutions, which must market products

and services across holding company affiliates and

subsidiaries.'** For that reason, they suggested that any

exemption for an “established business relationship” should

extend to all members of a corporate family, including

affiliates and subsidiaries, so long as the individual has an

“established business relationship” with any member of that

'47 See, e.g., BofA-NPRM at 4; Bank One-NPRM at 4; Eagle Bank-

NPRM at 2; Roundtable-NPRM at 5; Fleet-NPRM at 4; VISA-NPRM at

3-4,

'48 Coe Bank One-NPRM at 4; Fleet-NPRM at 4.

ne es a a ee nla AEF NL PE en Sal OEE lat LE DEDEDE AERIS II HG Mat Dl ett it LOE am IEP A

217a

corporate family.'*? They also suggested that agents of the

seller be inciuded within the exemption if the consumer

reasonably would expect the agent to be included under the

exception.'~”

The Commission believes that such a broad definition of

“established business relationship” is inappropriate in the

context of a “do-not-call” registry which is intended to

protect consumers’ privacy. As stated earlier, the Commis-

sion believes that such an exemption must be narrowly

crafted to avoid defeating the purpose of the “do-not-call”

registry. In determining whether affiliates or subsidiaries

should be encompassed within an “established business

relationship,” the Commission looks to consumer expecta-

tions: If consumers received a call from a company that is an

affiliate or subsidiary of a company with whom they have a

relationship, would consumers likely be surprised by that call

and find it inconsistent with having placed their telephone

number on the national “do-not-call” registry?

The Commission used similar reasoning in resolving this

issue in connection with the definition of “seller” in the

original Rule. In the discussion on the definition of “seller,”

the Commission stated that there were several factors that it

would consider in determining how it would view the Rule’s

application to diversified companies or divisions within one

parent organization. Among those factors was “whether the

nature and type of goods or services offered by the division

are substantially different from those offered by other

divisions of the corporation or the corporate organization as a

whole.” '*' This distinction looks to consumer expectations

and whether a consumer would perceive the division to be the

' See Eagle Bank-NPRM at 2; HSBC-NPRM at 2; Roundtable-

NPRM at 5.

'S° See Roundtable-NPRM at 5.

'S| 60 FR at 43844.

218a

same as or different from other divisions or from the

corporate organization as a whole. For example, a consumer

who had purchased aluminum siding from Company A’s

aluminum and vinyl siding subsidiary would likely not be

surprised to receive a call from kitchen remodeling service

also owned by, and operating under the name of, Company A.

Thus, under the amended Rule, some but not all affiliates

will be able to take advantage of the “established business

relationship” exemption to the national “do-not-call” registry.

The Commission intends that the affiliates that fall within the

exemption will only be those that the consumer would

reasonably expect to be included given the nature and type of

goods or services offered and the identity of the affiliate. The

consumer’s expectations of receiving the call are the measure

against which the breadth of the exemption must be judged.

§ 310.2(0) —Free-to-pay conversion

Section 310.2(0) of the amended Rule sets out a new

definition:—”free-to-pay conversion.” In connection with an

offer or agreement to sell or provide goods or services, a

“free-to-pay conversion” is “a provision under which a

customer receives a product or service for free for an initial

period and will incur an obligation to pay for the product or

service if he or she does not take affirmative action to cancel

before the end of that period.” The term “free-to-pay

conversion” is the terminology commonly used in the

telemarketing industry to describe what was referred to

throughout the Rule Review proceeding as a “free trial

offer,”!*

152

See, e.g., Electronic Retailing Association, GUIDELINES FOR

ADVANCE CONSENT MARKETING, http://www.retailing.org/regulatory/

publicpolicy—consent.html; Magazine Publishers of America, Resources

-Research: “Advance Consent Subscription Plans,” http://www.

magazine.org/resources/advance—consent.html.

oN ee ee

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219a

A “free-to-pay conversion” is a form of “negative option

feature”—a term that is also newly defined in the amended

Rule and is discussed below. The term “free-to-pay

conversion” comes into play in the amended Rule in three

provisions. First, as a form of negative option feature, any

“free-to-pay conversion” is subject to the newly-added

disclosure requirements in § 310.3(a)(1)(vii). Second, where

a telemarketing offer involves a “free-to-pay conversion,” and

is accepted by a consumer using a payment method subject

to the express verifiable authorization requirements of

§ 310.3(a)(3), the seller or telemarketer may not use the

written confirmation form of authorization generally available

under § 310.3(a)(3)(iii). Third, under the new unauthorized

billing provision at § 310.4(a)(6), the amended Rule sets forth

specific requirements to obtain express informed consent in

any transaction involving preacquired account information

and a “free-to-pay conversion.” Each of these provisions is

discussed in detail below.

§ 310.2(q)—Material

The amended Rule retains unchanged the definition of

“material” from the original Rule, except for extending it to

charitable contributions pursuant to the mandate of the USA

PATRIOT Act. The Commission received no comments on

this definition in response to the NPRM. The amended Rule

has deleted the designations for subsections (a) and (b) that

had been proposed in the NPRM. This is merely a formatting

change and does not alter the substantive content of the

definition. The amended Rule’s definition of “material,”

therefore, reads: “likely to affect a person’s choice of, or

conduct regarding, goods or services or a charitable

contribution.”

§ 310.2(t)—Negative option feature

The amended Rule includes new requirements in

§ 310.3(a)(1)(vii) for specific material disclosures necessary

220a

to avoid misleading consumers with respect to offers that

entail incurring an obligation to pay a seller due to the

consumers’ non-action. To describe the circumstances when

these disclosures must be made, the amended Rule employs

the term “negative option feature” and, accordingly, provides

a definition of that term in § 310.2(t). A “negative option

feature” is any provision under which the consumer's silence

or failure to take an affirmative action to reject goods or

services or to cancel the agreement is interpreted by the seller

as acceptance of the offer. This provision includes, but is not

limited to, “free-to-pay conversions,” (which are discussed

above), as well as negative option plans 'S3 and continuity

plans.'™* Section 310.3(a)(1)(vii) below provides a detailed

'S3 Under a “negative option plan,” the customer agrees to purchase a

specific number of items in a specified period of time. The customer

receives periodic announcements of the selections; each announcement

describes the selection, which will be sent automatically and billed to the

customer unless the customer tells the company not to send it. See the

Commission's Rule governing “Use of Negative Option Plans by Sellers

in Commerce,” 16 CFR 425.

‘4 A “continuity plan” consists of a subscription to a collection or

series of goods. Customers are offered an introductory selection and

agree to receive additional selections on a regular basis until they cancel

their subscription. Unlike negative option plans, customers do not agree

to buy a specified number of additional items in a specified time period,

but may cancel their subscriptions at any time. Continuity plans resemble

negative option plans in that customers are sent announcements of

selections and those selections are shipped automatically to the customer

unless the customer advises the company not to send them. Unlike

negative option plans, however, customers are not billed for the selection

when it is shipped, but only if they do not return the selection within the

time specified for the free examination period. See, e.g., FTC Facts for

Consumers, “Continuity Plans: Coming to You Like Clockwork,” (June

2002), http://www. fic.gov/bep/online/pubs/products/continue. htm. See

also FTC, “Pre-Notification Negative Option Plans” (May 2001)

(distinguishing these plans from continuity plans), http:// www.fte.

ov/bcp/online/pubs/products/negative.htm), and FTC, “Facts for Business:

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22la

discussion of the definition of “negative option feature” and

the disclosures necessary when such a provision is a part of

an offer to sell goods or services.

§ 310.2(u)—Outbound telephone call

Based on a review of the record, the Commission has

decided to retain the definition of “outbound telephone call”

that was in the original Rule, and not to expand the definition

to include “upsell” transactions, as proposed in the NPRM.

Many commenters noted that, by including upselling in the

proposed Rule’s definition of “outbound telephone call,” the

proposal brought upselling transactions within all of the

provisions relating to outbound calls, which led to unintended

and undesirable consequences, such as subjecting upsells to

the calling time restrictions and national “do-not-call”

registry provisions.'** The amended Rule addresses upselling

transactions separately, rather than attempting to sweep them

within the definition of “outbound telephone call.” '* The

amended Rule reinstates the original definition of “outbound

telephone call,” with only a modification to reflect the

expanded reach of the Rule to charitable contributions

pursuant to the USA PATRIOT Act. In the amended Rule,

then, an “‘[oJutbound telephone call’ means a telephone call

initiated by a telemarketer to induce the purchase of goods or

services or to solicit a charitable contribution.”

Complying with the Telemarketing Sales Rule,” http:// www.ftc.

ov/bep/online/pubs/buspubs/tsr. htm.

'S See, e.g., ABA-NPRM at 4; AmEx-NPRM at 6; AFSA-NPRM at

16; Associations-NPRM at 3; Cendant-NPRM at 2; CCC-NPRM at 13;

Cox-NPRM at 6; KeyCorp-NPRM at 6; Metris-NPRM at 9; MBA-NPRM

at 4; NBCECP-NPRM at 2; NCTA-NPRM at 13-14; PCIC-NPRM at 1;

PMA-NPRM at 10-11; Time-NPRM at 10; VISA-NPRM at 8; Wells

Fargo-NPRM at 5-6.

'*® See § 310.2(dd), defining the term “upselling” in the amended Rule.

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§ 310.2(w)—Preacquired account information

The amended Rule adds a definition of “preacquired

account information” to address the problems that have been

associated with telemarketing transactions where the

telemarketer already has access to the customer’s billing

information at the time the outbound call is placed.'°’ The

NPRM discussed these problems at length. The Commission

used the term “preacquired account telemarketing” in the

NPRM during its discussion of the proposed ban on

disclosing or receiving billing information for use in tele-

marketing, but did not use the term itself in the proposed

Rule, and so did not define it.'** In response, several industry

commenters asked for more specificity as to what the

Commission intends the term to mean.'~?’ Thus, the definition

of “preacquired account information” also serves te address

these commenters’ concerns about clarifying the concept of

preacquired account telemarketing.

As explained in detail in the discussion of § 310.4(a)(6)

below, the amended Rule sets forth specific requirements for

obtaining express informed consent in any telemarketing

transaction that involves “preacquired account information.”

To clarify the situations where these requirements come into

play, the amended Rule defines “preacquired account infor-

mation” as:

any information that enables a seller or telemarketer to

cause a charge to be placed against a customer’s or

donor’s account without obtaining the account number

direct'y from the customer or donor during the

'°7 See discussions of amended Rule § § 310.4(a)(5) and (6) below.

58 See 67 FR at 4512-14.

'? See, e.g., June 2002 Tr. II at 123-24 (CCC), 133-34 (ERA) and 173

(ATA); PMA-NPRM at 13-14; MPA-Sewp. at 5; PRA-NPRM at 13-14.

223a

telemarketing transaction pursuant to which the account

will be charged.

The Commission intends this definition to be construed

broadly. The definition includes any type of billing infor-

mation, encrypted or unencrypted, that enables a seller or

telemarketer to cause a charge to be placed on any customer’s

or donor’s account without obtaining the account number

directly from the customer or donor. It obviously covers

instances where the seller or telemarketer is in actual

possession of account information, whether by virtue of some

prior relationship with the consumer or otherwise. It also is

intended specifical'y to address affinity marketing campaigns

where, for example, through a joint marketing arrangement,

Seller A provides access to its customer base and those

customers’ accounts or account numbers to Seller B in

exchange for a percentage of the proceeds from each sale. '*!

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Some industry members expressed their belief that this

second class of transactions does not involve preacquired

account information at all because, in such affinity marketing

campaigns, Seller B may possess only encrypted account

numbers, or no account numbers at all prior to initiating the

call to the consumer.'® The Commission intends to clarify

‘9 By “unencrypted,” the Commission means both unencrypted

readable account information, and encrypted information in combination

with a decryption key. See discussion of amended Rule § 310.4(a)(5)

below. ;

6! See 67 FR at 4513.

‘ ERA/PMA-Supp. at 14; June 2002 Tr. II at 134 (ERA). ERA

described such a scenario during the June 2002 Forum:

“What typically might occur is L.L. Bean might enter into some

type of [affinity] agreement with Timberland to say, We would like

you to sell your boots . . . to our customers. .. . So L.L. Bean would

provide the name and telephone number . . . and they might provide

some unique identifier, it could be a four digit code. It might be an

encrypted code that’s used solely for the purpose of matching back,

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224a

that such an arrangement does invoive “preacquired account

information,” since the seller or telemarketer does not have to

obtain the account number from the customer or donor in

order to cause a charge to be placed on the customer’s or

donor’s account.

Finally, this definition would apply te upsell transactions,

because the seller or telemarketer in the upsell transaction

may either already possess the account information from the

initial transaction, or would, by virtue of a joint marketing or

other arrangement, have access to that information, so as to

be able to charge the customer without getting the account

number directly from the customer in the upsell transaction.

§ 310.2 (cc) —Telemarketing

The Commission received very few comments on its

receive expressed agreement that the definition should

continue to include the phrase “by use of one or more

telephones,” to ensure that large and small telemarketing

but the account billing number or any information that would

provide access to the account is not transmitted to the telemarketer

when you make that call. They make the call to the consumer.

They ask the consumer if they want to order the boots. If the

customer says yes, that information is then transferred to

Timberland. Timberland would go back to L.L. Bean and say, This

customer has accepted our offer. We would now like to get the

account information to bill the consumer for something that they’ve

authorized.”

June 2002 Tr. II at 136-37.

'63 Although few commenters directly addressed this definition, many

who commented on the USA PATRIOT Act amendments discussed the

expansion of the Rule to cover the solicitation of charitable contributions.

These comments are addressed above, in the discussion of amended Rule

§ 310.1 relating to the scope of the Rule.

NE OR ee eT ene ae er eT i

225a

operations are covered by the Rule.' Based on the

Commission’s review of the record in this proceeding, the

- amended Rule retains unchanged the definition of

“telemarketing” that was proposed in the NPRM. This

definition is virtually the same as that in the original Rule,

except that it now includes the phrase “or a charitable

contribution” following “goods or services,” pursuant to the

mandate of the USA PATRIOT Act.

§ 310.2(dd) —Upselling

As described above in § 310.2(u), the Commission

proposed in the NPRM to modify the Rule’s definition of

“outbound telephone call” to include most upsell trans-

actions.’ The majority of commenters who addressed this

issue, including both industry members and consumer groups,

supported the proposition that upsells should be expressly

' DOJ-NPRM at | (noting its experience with fraudulent tele-

marketers operating using only one or two telephones); Patrick-NPRM

at 2 (urging tha: the practice of subcontracting telemarketing to individual

sales agents who work from their nomes using their home phones

continue to be captured by the Rule).

sa Specifically, the Commission proposed amending the definition to

mean “any telephone call to induce the purchase of goods or services or to

solicit a charitable contribution, when such telephone call: (1) is initiated

by a telemarketer; (2) is transferred to a telemarketer other than the

original telemarketer; or (3) involves a single telemarketer soliciting on

behalf of more than one seller or charitable organization.” Proposed Rule

§ 310.2(t), 67 FR at 4541.

'° See, e.g., AMEX-NPRM at 6 (“We agree with the Commission that

the disclosure requirements of the TSR should apply whenever a new

offer is made to the consumer, whether by the original telemarketer or a

telemarketer to whom a call is transferred. Consumers should always be

informed of material terms ard conditions before they purchase a

product.”); ERA-NPRM at 8, 11 (“The ERA is cognizant of the fact that

the practice of upselling has increased dramatically since the Rule was

originally promulgated in 1995. .. . The ERA acknowledges the

Commission’s desire to include upsells within the ambit of the Rule and

;

226a

suggested that the Commission’s proposal to address the

problem by expanding the definition of “outbound telephone

call” to include upselling was not the most effective way to

achieve this goal.'°’ Instead, many commenters recommended

treating upsells as a distinct type of transaction by adding a

definition of “upselling” to the Rule and specifying a unique

set of disclosures required in upsell transactions.'** Others

suggested retaining the expanded definition of “outbound

telephone call” but amending it to avoid application of certain

provisions unnecessary or inappropriate to the upselling

time provisions of the Rute, to upsells.'’° The Commission

supports the position that, in instances where solicitations are made during

a single telephone call on behalf of multiple una.filiated entities, there

should be a clear disclosure. . . .””); ERA-Supp. at 6; LSAP-NPRM at 6;

NAAG-NPRM at 36; NCL-NPRM at 3; PMA-NPRM at 4, 8 (“PMA

acknowledges that the practice of marketing products and services via

upsell offers has increased in recent years and that the existing TSR does

not provide express guidance regarding responsible marketing practices

via the upsell channel.”); June 2002 Tr. II at 213-15, 249-50. But see

CCC-NPRM at 15-16; CMC-NPRM at 7; Household Auto-NPRM at 3;

Keycorp-NPRM at 5-6; Noble-NPRM at 3; NATN-NPRM at 3-4, NSDI-

NPRM at 4; PCIC-NPRM at 1-2; Technion-NPRM at 5.

'67 AmEx-NPRM at 6; ARDA-NPRM at 4; DMA-NPRM at 38; ERA-

NPRM at 8, i2: Household Auto-NPRM at 3; ICT-NPRM at 2; E-

Commerce Coalition-NPRM at 2; NCTA-NPRM at 14; PMA-NPRM at 8-

10; SILA-NPRM at 3; Time-NPRM at 9; June 2002 Tr. II at 213-14.

168 ee, e.g., ERA-NPRM at 14-15; ERA-Supp. at 6, PMA-NPRM

at 8-10.

‘69 ARDA-NPRM at 4; Cox-NPRM at 36; Discover-NPRM at 5; Eagle

Bank-NPRM AT 4; NCL-NPRM at 3.

'70 ABA-NPRM at 4-5; AFSA-NPRM at 15; ARDA-NPRM at 4; CCC-

NPRM at 13; DMA-NPRM at 38; Eagle Bank-NPRM at 4; NCTA-NPRM

at 14; PMA-NPRM at 10; SIIA-NPRM at 3; Time-NPRM at 10. The “do-

not-call” provision is found at proposed and amended Rules §

310.4(b)(1)(iii), while the calling time restrictions are at proposed and

amended Rules § 310.4(c).

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227a

does not intend for upselling to be subject to the “do-not-call”

requirements or the calling time restrictions in the Rule.'”!

The goal of the initial proposal,'’* and the focus of the current

amendments, is to ensure that consumers in upselling

transactions receive the same information and protections as

consumers in other telemarketing transactions subject to

the Rule.

Based upon the comments received during the rulemaking

period and the Commission’s law enforcement experience,

the Commission has taken a two-fold approach to upselling in

the amended Rule. The Commission has added a definition

of “upselling,” which, in combination with certain amend-

ments to § § 310.4(d) and 310.6 of the Rule,’” provides

important protections to consumers who, after completing one

transaction, are offered goods or services in an additional

telemarketing transaction during the same telephone call.'4

By including the definition, the Commission intends to clarify

that upsells are subject to all of the Rule’s requirements

'"! June 2002 Tr. II at 213-15.

'? See 67 FR at 4500.

"> Section 310.4(d) now includes the phrase “or internal or external

upsell” after “outbound telephone call” to clearly state that the basic

disclosuse requirements of that provision—the identity of the seller, that

the purpose of the call is to sell goods or services, the nature of the goods

or services, and disclosures related to prize promotions—must be made in

any upsell associated with an initial telephone transaction. Sections

310.6(b)(4), (5) and (6) have been amended to expressly exclude upsells

from these exemptions.

'* The provisions relating to “upselling” address the practices which

the Commission had proposed to address in the NPRM through

modification of the definition of “outbound telephone call.” Because the

amended Rule addresses the practice of “upselling” in a different manner,

the amended Rule retains unchanged the wording in the original Rule for

the definition of “outbound telephone call” (now expanded to cover calls

to induce charitable contributions, pursuant to the USA PATRIOT Act).

See § 310.2(u) of the amended Rule.

228a

except the “do-not-call” and calling time restrictions in

§§ 310.4(b)(1)(iii) and 310.4(c).'”> With this definitional

shift, the “do-not-call” regime no longer applies to upsells,

since the “do-not-call” provisions specifically prohibit

“initiating outbound telephone calls” to anyone who has

placed their telephone numbers on a company-specific “do-

not-call” list or on the FTC’s “do-not-call” registry.'”°

Second, the amended Rule expressly excludes upsell

transactions from the exemptions in §§ 310.6(b)(4), (5) and

(6)—1.e., where the initial transaction is exempted from the

Rule because the call was initiated by the consumer

unilaterally or because it was initiated in response to a direct

mail solicitation or general media advertisement.'”’

'75 In the NPRM, the Commission noted that in addition to the

disclosure requirements of § 310.4(d) (and the proposed disclosures of

§ 310.4(e)), the disclosures in § 310.3(a)(1):

“would, of course, also have to be made by each telemarketer. In

fact . . . the Commission believes that [in any upsell] it is necessary

for this transaction to be treated as separate for the purposes of

complying with the TSR. Therefore, in such an instance, the

telemarketer should take care to ensure that the customer/donor is

provided with the necessary disclosures for the primary solicitation,

as well as any further solicitation. Similarly, express verifiable

authorization for each solicitation, when required, would be

necessary. Of course, even absent the Rule’s requirement to obtain

express verifiable authorization, telemarketers must always take

care to ensure that the consumer’s or donor’s explicit consent to the

purchase or contribution is obtained.”

67 FR at 4500, n.71.

'’” Treating upsells as “outbound telephone calls” meant that they were

implicitly not covered by any of these exemptions (which all involve

inbound telephone calls of one sort or another). Creating a separate

definition for “upselling” requires that the Commission explicitly address

which of the exemptions in § 310.6 of the Rule do not apply to upselling.

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229a

The definition of “upselling” encompasses any solicitation

for goods or services that follows an initial transaction of any

sort in a single telephone call. Thus, both solicitations made

by or on behalf of the same seller involved in the initial

transaction, and those made by or on behalf of a different

seller are considered upsells, and both types of transactions

are covered by the Rule.'”® The term “initial transaction” is

intended to describe any sort of exchange between a

consumer and a seller or telemarketer, including but not

limited to sales offers, customer service calls initiated by

either the seller or telemarketer or the consumer, consumer

inquiries, or responses to general media advertisements or

direct mail solicitations. The upsell is defined as a “separate

telemarketing transaction, not a continuation of the initial

transaction” to emphasize that an upsell is to be treated as a

new telemarketing call, independently requiring adherence to

all relevant provisions of the Rule.'”’

Upselling occurs in a wide variety of circumstances—as an

addendum to a customer service call, or after an initial offer

of goods or services via an inbour! or outbound telephone

'® In the NPRM, the Commission focused its analysis of upselling on

whether there were one or two telemarketers or sellers involved in the

upsell transaction. After reviewing the record in this matter, the

Commission believes that the saiient distinction is whether a separate

offer is made in the course of a single telephone call.

' This detinition also addresses the concerns of some telemarketers

that simply transferring a consumer-initiated call to the individual most

qualified to address the consumer’s inquiry would trigger the application

of the Rule to that otherwise exempt transaction. See, e.g., CMC-NPRM

at 7-8; Cox-NPRM at 35; Eagle Bank-NPRM at 4; HSBC-NPRM at 2.

Instead of focusing on the transfer of a call, the definition of “upselling”

centers on the instigation of an offer for sale of goods or services

subsequent to an initial transaction. Thus, where a consumer calls a

company, makes an inquiry, and is immediately transferred in direct

response to that inquiry, that transfer would not fall within the definition

of “upselling” and would not be subject to the Rule.

230a

call, for example.'"’ The upsell can be made by or on behalf

of the same “eller involved in the initial transaction (“internal

upsell”), or a different seller (“external upsell”). Com-

menters argue that upsell transactions provide benefits to both

sellers and consumers. According to some industry com-

menters, sellers can reduce costs associated with tele-

marketing by linking transactions together in a single call,'*

and are more likely to make successful sales to consumers

already predisposed to the transaction.'*? Consumers can

180 See, e.g., NAAG-NPRM at 33 (“The upsell can follow either a sales

call or a call related to customer service, such as a call about an account

payment or product ‘epair. . . . Some examples are the upsell of

membership programs, magazines and the like or a television solicitation

to buy an inexpensive lighting product that includes an upsell of a costly

membership program, consumers sold a membership program when

attempting to purchase United States flags following the September 11,

2C01, tragedy, or tickets to entertainment events.”) (citations omitted).

Industry commenters emphasized the prevalence of upselling in the

inbound call context generally. See, e.g., CCC-NPRM at 12; ERA-NPRM

at 11-12; PMA-NPRM at 9-10

'8! The NPRM described these forms of upselling as “internal” and

“external.” 67 FR at 4496. Some commenters, such as ERA, noted that

the industry refers to multiple offers by a single seller—what the

Commission calls an “internal upsell”—as a “cross sell,” and to multiple

offers by separate sellers—what the Commission calls an “external

upsell”—as an “upsell.” ERA-NPRM at 9, n.3. The Commission’s

approach, however, does not appear to have caused any confusion in the

industry, or on the consumer side. So, for the sake of consistency both

within the rulemaking process and with existing law enforcement cases,

the Commission has decided to retain these terms as originally proposed.

82 See, e.g., PMA-NPRM at 9.

'83 CCC determined that 14 billion inbound calls are made per year, of

which 40 percent have an upsell associated with them. June 2002 Tr. II at

218. ERA estimated, based on a 12 percent conversion rate, that

approximately $1.5 billion in sales are generated through inbound upsells

alone each year. ERA-NPRM at 11. Aegis estimated the conversion rate

for consumers accepting upsell offers at between 25 and 30 percent.

Aegis-NPRM at 4.

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231a

benefit from the convenience of such transactions, and from

receiving more targeted marketing offers.'** Industry

commen-ters also suggested that sellers’ reduced costs in

such transactions are passed along as savings to consumers.'*°

Despite these benefits, upsells are no less vulnerable to

abuse than other telemar!tiig practices, and provide the

potential for harm to consumers. Some industry commenters

argued that this is not the case, suggesting that, particularly

when the call is initiated by the consumer: “The consumer

calling a business voluntarily puts herself in a business

environment and knows that she is doing so. It should come

as no surprise to the consumer if, once in that environment,

she is solicited for products and services provided by

affiliates or partners of the business... .” '*°

According to NCL, however, “[c]lomplaints to the NFIC

[National Fraud Information Center] indicate that abuses can

occur when consumers who respond to an advertisement for

one thing are then solicited for something else, especially if

the new offer is significantly different than the original one or

is from another vendor. In these situations, the only

information that consumers have on which to decide whether

to make a purchase or donation is that which is provided

during the call.” '*’ In other words, in any upsell, the seller or

telemarketer initiates the offer; it is not the consumer who

solicits or requests the transaction. This means that the

‘$4 DMA-NPRM at 40; PMA-NPRM at 10; SIIA-NPRM at 3.

'*S ERA-NPRM at 12; PMA-NPRM at 10; SIIA-NPRM at 3.

at 5; Household Auto-NPRM at 4.

‘8’ NCL-NPRM at 3. Accord ERA-NPRM at 11 (“The ERA is. . .

aware of the fact that there have been some marketers who have engaged

in unscrupulous marketing practices in soliciting purchases via upsells,

particularly when such upsells involve a free trial offer and/or other

advance consent marketing technique.”’).

232a

consumer is hearing the terms of that upsell offer for the first

time ‘he telephone. The consumer has not had an

Oppoi.unity \o review and consider the terms of the offer in a

direct mail piece, or to view an advertisement and gather

information on pricing or quality of the particular good or

service before determining to make the purchase. This makes

an upsell very much akin to an outbound telephone call from

the consumer’s perspective, even when the seller is someone

with whom the consumer is familiar, Thus, as NCL noted,

every consumer needs “the same basic disclosures about who

they’re dealing with, what they’re buying and the terms and

conditions [of the offer]” regardless of the nature of the

telephone sale.'** The disclosure provisions of §§ 310.3(a)

and 310.4(d) were designed to ensure that consumers know

they are being offered goods or services for sale, and receive

all information material to their decision to accept an offer

before they pay for the purchase.

Moreover, it should be noted that the introductory para-

graphs of § § 310.3(a), 310.4(a) and 310.5 do not distinguish

between types of telemarketing transactions.'*? The Rule is

clear that its requirements and prohibitions apply to all sel/ers

and telemarketers that are subject to the Commission’s

jurisdiction, Thus, a seller or telemarketer subject to the Rule

must abide by the requirements of these sections, regardless

of whether they are engaged in an initial telemarketing

'88 June 2002 Tr. II at 221-22.

' Section 310.3(a) states “it is a deceptive telemarketing act or

practice and a violation of this Rule for any seller or telemarketer to

engage in the following conduct.” (emphasis added). Similarly, §

310.4(a) states “it is an abusive telemarketing act or practice and a

violation of this Rule for any seller or telemarketer to engage in the

following conduct.” (emphasis added). Section 310.5(a) states “any seller

or telemarketer shall keep, for a period of 24 months from the date the

record is produced, the following records relating to its telemarketing

activities,”

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233a

transaction or in an upsell transaction. Indeed, the

Commission assumes that, where the initial transaction is

subject to the Rule, most sellers and telemarketers treat the

upsell as subject to the Rule as well, and comply with the

Rule’s requirements in both segments of the telephone call,'”°

The Commission also finds that consumers should have the

Rule’s billing protections in each of these transactions. COC

Suggested that, at least in inbound calls that include upsells,

consumers have “the highest level of consumer protection

because the consumer is specifically asked and consents to

the additional goods or services being charged to the same

billing source the consumer provided and/or accessed just

moments before.” '?' However, the Commission’s and states’

law enforcement experience does not support CCC’s

assertion that, by giving consent to the use of an account

'® The record Suggests, however, that the opposite is true when upsells

are appended to calls that are otherwise exempt from the Rule. In these

instances, the upsells have been treated as part of the exempt

telemarketing transaction and, thus, consumers are not receiving the

protections the Rule requires when a consumer receives an outbound

telephone call, despite the fact that upsells are similar to outbound calls

from the consumer’s perspective. See, e.g., PCIC-NPRM at 1-2. The

Commission believes that the protections provided a consumer in an

upsell should be the same as the protections accorded to consumers

receiving an outbound telephone call, regardless of whether the upsell is

appended to an exempt telemarketing transaction or to a transaction

subject to the Rule. As noted above, consumer advocates and the FTC’s

law enforcement experience confirm that upselling can be equally or more

problematic, and thus sellers and telemarketers engaged in upselling

should be required to provide the basic disclosures mandated by the Rule.

In addition, there is no evidence to Suggest that upsells should not be

Subject to any other part of the Rule (other than the “do-not-call” and

calling time restrictions).

'"' CCC-NPRM at 12.

234a

number in an initial transaction, the consumer in an upsell is

afforded protection from deception or unauthorized billing. '”

Other recommendations

Limitations to the definition of “upselling.” Some com-

menters suggested that the definition of “upselling” be limited

to “external upselling” transactions (i.e., where there are two

different sellers in the two transactions).'”? They argued that

any requirements that the Commission might apply to

“upselling” should not include upsells made by or on behalf

of the same seller.'"* However, the Commission believes that

law enforcement experience indicates that “internal upsells”

(where both transactions are by or on behalf of the same

seller) have as much potential for deception and abuse as

other types of telemarketing transactions that are subject to

' Indeed, law enforcement experience indicates that the fact that the

consumer has already provided or authorized use of his or her billing

information [in an initial transaction may actually result in greater risk of

abuse during the second transaction. For example, in actions by the FTC

and several states against Triad Discount Buying Service, Inc., and related

entities, the Commission and the states alleged that the defendants crafted

a marketing campaign designed to lure consumers to call solely for the

purpose of upselling them. See FTC v. Smolev, No, 01-8922-CIV

ZLOCH (S.D. Fla. 2001). Specifically, the Commission and states

alleged that the defendants ran an advertising campaign for a free product,

inviting consumers to call a toll-free number. When they called,

consumers were asked to provide account information to pay for shipping

and handling for the free product, and then were upsold a “free trial” in a

membership club or buyers club, that was then charged, without the

consumer's knowledge or consent, to the account provided by the

consumer to pay for the shipping of the first product. See also NAAG-

NPRM at 30, n.73 (citing, among others such cases, /llinois v. Blitz

Media, Inc. (Sangamon County, No. 2001-CH-592) and New York vy.

Ticketmaster and Time, Inc., (Assurance of Discontinuance)).

'3 ERA-NPRM at 9; NCTA-NPRM at 14.

194 Id.

235a

the Rule’s requirements.'”’ Therefore, the Commission has

not adopted this suggestion.

Other commenters argued that the definition of “upselling”

should not include upsells by “affiliates.” '”° Still others made

more specific requests to exempt banks, their affiliates and

non-affiliated third parties who provide services on the banks’

behalf or with whom the banks have joint marketing

relationships; '”’ to exempt agents or affiliates of common

carriers; '"* and to exempt affiliates of insurance com-

panies." However, once again, there is scant support

justifying such an approach. On the contrary, the record as a

whole and law enforcement experience indicate that upsells

by affiliates and non-affiliated third parties with whom there

is a joint marketing relationship have as much potential for

deception and abuse as other types of telemarketing

transactions that are subject to the Rule’s requirements.””’

The Commission has made it very clear that the Rule does

not apply to entities or activities that fall outside the

Commission’s authority under the FTC Act, such as banks,

savings associations and federal credit unions; regulated

common carriers, and the business of insurance. However,

‘8 See

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