FTC v. Verity Intern., Ltd.

Citations: 335 F. Supp. 2d 479; 2004 U.S. Dist. LEXIS 18591Docket: 00 Civ.7422(LAK)

Court: District Court, S.D. New York; September 17, 2004; Federal District Court

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In the case Federal Trade Commission v. Verity International, Ltd. et al., the FTC alleges that the defendants—Robert Green, Marilyn Shein, Automatic Communications Ltd. (ACL), and Verity International, Ltd.—engaged in deceptive billing practices related to adult content websites. The defendants offered a service that allowed website operators to bill customers for access by including charges on their telephone bills, misrepresenting these charges as calls to Madagascar. The FTC claims violations of Section 5(a) of the FTC Act on two main grounds: firstly, that the defendants demanded payment from individuals who neither accessed nor authorized access to the adult websites, and secondly, that they misrepresented the nature of the services by inaccurately labeling the charges as telephone calls to Madagascar instead of as internet access fees. The FTC seeks a permanent injunction to prevent the defendants from providing such services and to stop ACL from billing without express subscriber authorization. The case involves findings from a bench trial based on agreed evidence, with the parties' prior involvement in the business model and ownership structure of ACL and Verity detailed, noting that both companies provided billing services and were co-owned by Green and Shein.

Green and Shein acknowledge their joint control over ACL and Verity from the companies' incorporation until September and October 2000, respectively. Their operations relied heavily on industry contacts developed over a decade. Post-acquisition by Oriel in September 2000, ACL became central to Oriel's business, while Verity's operations were short-lived, ceasing shortly after a temporary restraining order in October 2000.

The billing system central to the litigation involved a user accessing adult content online, which offered a dialer option to purchase additional content. Upon selecting this option, users were presented with terms specifying that charges would appear as international calls on their phone bills. Users had to agree to these terms to download a dialer program. This program disconnected users from their ISP and initiated a call to a Madagascar number, which was actually rerouted to servers in the UK, allowing content delivery while billing the line subscriber based on automatic number identification (ANI). Initially, charges appeared as calls to Madagascar, later shifting to separate bills while still claiming the calls terminated in Madagascar.

A significant dispute arose regarding the defendants' involvement in the billing system, which they sought to downplay by blaming carriers and other parties. However, the Court found that the ACL defendants were instrumental in devising and controlling the system through various agreements with carriers, billing agents, and information providers (IPs). Notably, in May 1997, ACL secured exclusive rights from Telecom Malagasy to manage calls to designated Madagascar numbers, allowing them to redirect calls and receive related revenues. Additionally, ACL entered agreements with IPs, including Global Internet Billing, Inc. (GIB), to market dialer billing programs associated with these numbers, with GIB agreeing to promote usage in exchange for a fee based on call minutes.

A March 31, 2000 amendment mandated that ACL authorize services utilizing numbers for modem dialing and granted ACL limited authority to approve disclaimers, although ACL did not create or provide web content. 

ACL's billing system relied on agreements with originating carriers, beginning with AT&T in January 1999. This agreement allowed AT&T to carry and terminate calls to Madagascar numbers assigned to ACL, with payments structured in a "cascade arrangement" where AT&T paid AT&T U.K., which then paid ACL. AT&T was responsible for setting call prices and handling consumer complaints.

Following AT&T's termination of the contract in July 2000 due to misuse of ACL's lines, ACL entered into an agreement with Sprint on July 11, 2000. This agreement required Sprint to carry and bill for calls, recognizing that calls would use dialer software for entertainment services. ACL was to include two disclaimers regarding the long-distance charges to Madagascar, displayed to consumers before dialing. Although Sprint agreed to these terms, it ultimately did not bill or collect the charges. A subsequent settlement agreement on August 16, 2000, released Sprint from its billing responsibilities but allowed ACL to assume these duties under specific protocols, including a cap of $3.99 per minute and customer-friendly collection practices. The agreement also required Sprint to provide the necessary ANI information to identify callers and was contingent on ACL's assurance that calls were being terminated in Madagascar.

After Sprint declined to bill for ACL's traffic, ACL arranged for eBillit to handle billing, payments, and consumer inquiries starting August 21, 2000. eBillit subcontracted printing and mailing to Output Services Group (OSG) and customer service to ICT Group.

Cascade payment arrangements were established whereby consumer payments flowed from AT&T to multiple parties, ultimately reaching website operators. Consumers paid AT&T, which then paid AT&T U.K. (later Viatel), which in turn paid ACL. ACL subsequently paid GIB, who paid website operators. Green and Shein were key in setting up these relationships central to the ACL billing system.

During the AT&T Period (January 1999 - July 23, 2000), AT&T carried, billed, and collected calls to ACL's numbers, treating them like standard residential calls. Charges appeared on consumers' monthly statements as long-distance calls to Madagascar, with potential disconnection for non-payment. AT&T used Automatic Number Identification (ANI) for billing regardless of the callers' authorization, and handled ACL calls with the same personnel and processes as other residential calls. There was a significant increase in billing: AT&T billed approximately $28.9 million in 2000, up from $1.6 million in 1999, with contested bills rising from 8% to 38% of total billings. ACL received $2.1 million in 1999 and $8.6 million in 2000. While some subscribers were users of ACL's dialer program, the exact number and the portion of the billed amount attributed to videotext services were unknown. Defendants suggested a 50/50 split between videotext and other calls, which was deemed too low; Oriel’s public filings indicated that most service charges were for videotext.

During the Sprint Period (July 11, 2000 - September 2000), Sprint managed calls to ACL's Madagascar numbers, with Integretel defendants handling billing. Bills were sent separately from regular phone bills, detailing charges for international calls to Madagascar from a modem for website access, with specific information on call dates, times, durations, and charges. Green approved the final bill format, and eBillit sent out 91,683 bills totaling approximately $11.7 million for July and August services in a brief period.

The Integretel defendants, similar to AT&T, billed consumers for ACL traffic based on ANI information provided by Sprint, regardless of whether the calls were authorized. This practice led to a significant volume of consumer complaints, with 24,986 inquiries directed to eBillit regarding Verity bills and 548 complaints filed with the FTC within a short period in September 2000. Many consumers faced challenges when disputing charges, as the call center was overwhelmed and often resulted in busy signals or lengthy wait times, averaging over 19 minutes, with 72% of calls abandoned. The call center employed a "hard sustain" policy, discouraging adjustments and warning consumers about potential consequences of nonpayment. Following the FTC's intervention, adjustments were more readily granted, increasing from 3% to 63% for disputes after the action. Despite policy changes, some representatives continued to issue only partial adjustments. Ultimately, 19,544 consumers paid a total of $1,616,678 in response to these disputed bills, which many claimed were for calls they did not make or authorize.

Neither the FTC nor the defendants has knowledge of the exact number of subscribers who made or authorized the calls billed in this case. Out of 19,544 customers who paid, 6,248 made inquiries, resulting in partial adjustments totaling $573,811 of the $1.6 million collected from Verity bills. The FTC brings four claims under Section 5(a) of the FTC Act: Count I alleges deceptive practices through misrepresentation of subscribers' legal obligations to pay for videotext services regardless of use; Count II claims these misrepresentations were unfair; Count III asserts that defendants misrepresented call destinations to Madagascar; and Count IV contends that defendants failed to clearly disclose the costs associated with connecting to videotext services.

Defendants argue that ACL, as a common carrier, falls outside FTC jurisdiction; however, the Court previously ruled that ACL's activities do not qualify as common carrier activities under the Communications Act, and this ruling remains applicable. To prove a deceptive act under Section 5(a), the FTC must show a material representation or omission likely to mislead reasonable consumers.

For Count I, the FTC must demonstrate that defendants misled subscribers into believing they were legally obligated to pay, irrespective of their usage. During the AT&T Period, charges appeared on monthly telephone bills, which threatened disconnection for nonpayment. Although defendants claim they did not influence the bill format, they intentionally benefited from the established consumer perception of obligation to pay telephone bills, leveraging AT&T's standard billing to create the impression of legitimacy. The Verity bills, despite not appearing on regular phone bills during the Sprint Period, mimicked them and included detailed charges, clearly indicating due amounts and payment instructions, leading recipients to reasonably conclude they owed the charges.

Callers on hold were warned via an automated recording that failure to pay could lead to the blocking of their phone lines for certain services and additional collection efforts. Customer Service Representatives (CSRs) reinforced that the charges were valid and required payment. Despite a change in handling calls following an FTC lawsuit, there was no indication that consumers were informed they were not legally obligated to pay if they had not authorized use of the services. The defendants argued they were not liable since eBillit managed billing and collections during the Sprint Period. However, the Court found that defendants played a substantial role in the billing process by approving the bill formats, recordings, and CSR instructions, thereby representing that subscribers had a legal obligation to pay regardless of actual use or authorization of the services.

The Court examined whether subscribers who did not use or authorize the services were legally obligated to pay, determining that if they were not, the defendants' claims were materially false. Defendants invoked the filed rate doctrine, asserting that subscribers must pay for all calls made from their lines, regardless of authorization. The Court rejected this argument, noting that the FCC has differentiated between basic telecommunications services and enhanced services, with the latter not subject to comprehensive regulation or filed tariffs. The defendants provided enhanced services, such as downloading software and managing connections, rather than just basic transmission, and failed to identify any applicable tariffs for their offerings. They contended that the calls were merely telephone services covered by existing tariffs, but the Court emphasized that the nature of the services provided went beyond basic telecommunications.

Consumers were charged for a package of Internet services that included a dialer billing program and content, not solely for calls to Madagascar, which were not covered by the relevant Sprint or AT&T tariffs for basic international calls. The existence of contracts between line subscribers and defendants is questioned, emphasizing that a contract requires mutual acceptance. The Court determined that consumers were misled into believing they were obligated to pay for services they did not authorize. Specifically, Count III alleges violations of Section 5(a) of the FTC Act due to defendants billing for calls that appeared to be to Madagascar but were actually terminated in other countries. This misrepresentation was found to be materially false, as it affected consumer understanding of charges. The defendants' defense—that calls were completed to dialed numbers under the filed tariffs—was rejected, as the tariffs applied only to calls terminating in the designated foreign locations. Count IV addressed the inadequate disclosure of costs associated with the Internet services; however, the Court ruled this claim as without merit, noting that costs were clearly stated in a brief disclosure form presented to users prior to service access.

The FTC alleges that defendants engaged in unfair trade practices by billing line subscribers for Internet services that they did not use or authorize, violating Section 5(a) of the FTC Act. An act is deemed unfair if it likely causes substantial injury to consumers that cannot be reasonably avoided and is not outweighed by countervailing benefits. Evidence from the AT&T Period shows many subscribers were incorrectly charged based on Automatic Number Identification (ANI) without verifying authorization for the calls. In 2000, AT&T faced a 35% chargeback rate, indicating widespread disputes from consumers. Prior to this, during the Sprint Period, at least 9% of billed consumers received adjustments for unauthorized charges, suggesting the actual number of impacted subscribers was higher due to call center accessibility issues. The court concluded that the harm to consumers was not counterbalanced by any benefits of the billing method, and the defendants profited from consumer fears of credit damage, leading them to pay unjustified bills.

For individual liability under the FTC Act, the FTC must demonstrate that an individual defendant directly participated in or controlled the wrongful practices and had knowledge of them. The authority to control can be shown through active involvement in business affairs and corporate policy-making. Green and Shein acknowledged their joint control over the corporate defendants' actions until specific dates in 2000, confirming their direct participation in the unfair practices. The FTC does not need to prove intent to defraud to establish violations or seek relief.

Green and Shein, as founders and major shareholders of ACL and Verity, are individually liable for violations of the FTC Act due to their knowledge and involvement in fraudulent billing practices. They designed the ACL billing system in collaboration with major telecom companies, knowing that charges were misrepresented on consumer phone bills as calls to Madagascar instead of charges for internet services. The FTC seeks injunctive relief, including a permanent ban on Green, Shein, and Verity from providing audiotext or videotext services to U.S. consumers, due to the substantial and calculated nature of their fraud, lack of remorse, and previous contempt of court orders.

The Court finds that the defendants’ actions have caused significant consumer harm, and they have shown intent to evade U.S. authorities by directing funds overseas. A broad permanent injunction is deemed necessary to prevent future violations and further consumer injury. Additionally, ACL will be restricted from ANI-based billing practices unless explicit consumer authorization is obtained or clear statements are provided on bills regarding payment obligations. These measures aim to prevent ACL from repeating prior misconduct.

ACL is prohibited from misrepresenting the legal obligations of line subscribers regarding payments for Internet services obtained through its billing system and from misrepresenting the nature of charges on bills. The FTC seeks restitution, consumer redress, and disgorgement of funds due to deceptive trade practices, supported by Section 13(b) of the Act, which allows for injunctive relief and equitable remedies. 

For the AT&T Period, the FTC seeks $16 million in disgorgement, arguing that the estimated $16.3 million billed for videotext in 2000 represents consumer losses. Defendants admit uncertainty about the exact amounts attributed to videotext versus audiotext but have not provided a clear distinction. Because their billing system failed to determine authorized use, the burden of uncertainty lies with the defendants, making them liable for $16.3 million in consumer redress.

During the Sprint Period, the FTC claims $1.6 million in consumer injury due to all calls being for Internet services, again attributing liability to the defendants due to their inability to ascertain authorized use. 

Additionally, the FTC requests the imposition of reporting, monitoring, and record-keeping requirements on the defendants to prevent future illegal conduct. The court will issue orders for such relief as necessary, without being unduly burdensome. The judgment against ACL, Green, and Shein totals $16.3 million, with joint and several liabilities.

Plaintiff is awarded $1,616,678 against defendants ACL, Verity, Green, and Shein, who are held jointly and severally liable. A permanent injunction is ordered in line with the opinion, and the preliminary injunction will remain effective until the permanent injunction is established. Both the plaintiff's and defendants' motions to admit additional declarations are denied as moot. The amended complaint also included Integretel, Inc. and its subsidiary eBillit, which entered into a consent decree. A third-party complaint against AT&T has been resolved. References to various FTC v. Verity International, Ltd. cases illustrate the procedural history, including multiple motions for summary judgment and contempt rulings against defendants for non-compliance with prior injunctions. The defendants do not dispute that their websites exclusively featured adult content, despite claiming their billing system could handle various content types. The document details the evidentiary basis for the claims and the authentication of consumer declarations, addressing hearsay objections and referencing relevant Federal Rules of Evidence.

The bills collected from customers, resembling typical telephone bills, include features such as the billing company's logo, a list of calls, and consumer account information, which support their authenticity. These bills are not considered hearsay since they are presented not to prove the truth of their contents but to establish that the statements were made. The Court finds, based on stipulations and admissions, that AT&T billed Internet services provided by defendants' clients as telephone calls to Madagascar and informed consumers of their legal obligation to pay for these services, regardless of authorization or actual calls. 

Despite the defendants' claims that ACL had a minimal role in the billing, representatives from ACL and Verity identified their companies as providers of dialer billing systems. ACL entered into an agreement with GIB to provide Madagascar number ranges for the dialer program, with Western Connections being an affiliate of ACL. The dialer circumvented the line subscriber's designated carrier using a specific dialing sequence. The litigation specifically addresses calls related to videotext services provided via the Internet. Two disclaimers were presented to consumers, warning them of the international call charges that would appear on their telephone bills, confirming that no credit card was required for access.

Certain customers may incur charges of up to $8.00 per minute based on their calling plan, with billing commencing upon connection in the foreign country. For inquiries regarding specific rates, customers are directed to call 1-800. The international number for calls is specified as XXX-X-XXXX to 9999. The agreement negotiated by Green and Sheen for ACL was executed under Verity's name, with Green arranging this change. Notably, ACL is identified as the recipient of net proceeds from the agreement, despite the agreement being in Verity's name. Integretel also substituted its name with that of its subsidiary, eBillit, in the final agreement. Both Green and Shein's declarations indicate that most of ACL’s activities involved telecommunications and billing transactions leveraging industry contacts, particularly in Madagascar. There is a dispute regarding when IPs began using ACL's numbers for videotext services, with billing data showing a significant increase in January 2000, potentially linked to the initiation of such services. Nonpayment of toll charges may lead to disconnection of local service and might result in collection actions. The FTC submitted eleven consumer declarations regarding billing issues during this period.

At least some line subscribers were improperly charged for calls to Madagascar that they did not make or authorize, as evidenced by consumer declarations PX 82 to PX 92. The defendants objected to these declarations on hearsay grounds, while the FTC argued for their admissibility under the residual exception to hearsay rules (Fed. Rule of Evid. 807). However, the Court found the FTC's position immaterial, as it ruled in favor of the FTC even without considering these declarations. The FTC provided 81 additional consumer declarations from the Sprint Period (PX 1 to PX 81), with the defendants waiving hearsay objections for 22 but challenging them on relevancy. The Court determined these declarations were relevant to the FTC's claims regarding unauthorized billing practices. The 59 consumer declarations objected to on hearsay grounds were deemed redundant and not considered in the decision. The evidence indicated that calls were billed at $3.99 per minute, the same rate as legitimate calls to Madagascar. Adjustments were issued to 8,651 subscribers (35% of those who contacted the defendants), with a significant majority (89%) of these adjustments made for consumers disputing the charges. It is inferred that many more consumers attempted to contact eBillit to dispute charges but faced busy signals. Call center data revealed high abandonment rates, with 60% of calls in September 2000 and 42% in October 2000 abandoned, and long wait times for those who remained on the line.

Uncertainty exists regarding whether the statistics provided by the defendants include calls that resulted in a busy signal. Various depositions and exhibits reference actions taken by individuals such as Green and Shein, who approved instructions for customer service representatives (CSRs) and emphasized adherence to a strict call strategy. Numerous documents illustrate the frequency and duration of calls made by plaintiffs, including instances of being placed on hold for extended periods. Legal precedents are cited, including multiple cases involving the FTC, emphasizing the need for transparency and compliance with financial disclosures. Green and Shein are accused of willfully obstructing the FTC's efforts to ensure financial restitution for consumers. The FTC's proposed order seeks financial relief from ACL defendants, including Verity, although Verity's involvement during the relevant period has not been substantiated. Thus, monetary relief concerning that timeframe is limited to ACL, Green, and Shein.