December 19, 2019
Commercial Litigation Alert
Commercial Litigation Alert
Author(s): Zachary C. Osinski
The Federal Trade Commission sent a clear message to VoIP providers this month that they will seek to hold upstream service providers accountable for turning a blind eye to their clients’ unlawful telemarketing practices. In an unprecedented action, the FTC shut down VoIP provider Globex Telecom, Inc. (“Globex”) for “assisting and facilitating” an alleged debt-reduction scam perpetrated by one of its customers. It was the FTC’s first action against a VoIP provider under the Telemarketing Sales Rule (16 C.F.R. Part 310), which prohibits a variety of deceptive practices in the sale of goods or services or the solicitation of charitable contributions over the telephone.
The case is notable for the breadth of its potential application to other VoIP providers, which the FTC could seek to hold responsible for violations even where they have no actual knowledge of their clients’ illegal conduct. Under the “assisting and facilitating” provision of the Telemarketing Sales Rule, a person or company can be liable for providing “substantial assistance or support” to a telemarketer not only when it knows the telemarketer is engaged in unlawful conduct, but also when it “consciously avoids knowing.” 16 C.F.R. Part 310.3(b). That means the FTC can pursue legal action against service providers that have reason to suspect their customers are engaged in unlawful practices but choose to turn a blind eye.
In FTC, et al. v. Educare Centre Services, Inc., et al., (No. 3:19-CV-196), the FTC and the Ohio attorney general alleged that multiple individuals and companies engaged in a telemarketing scam to sell phony credit card interest rate reduction services to consumers. The FTC and the Ohio attorney general then amended the complaint to add VoIP provider Globex as a defendant, alleging that Globex unlawfully provided co-defendant Educare Centre Services, Inc. (“Educare”) with the means to make calls, including illegal robocalls, to U.S. consumers to market Educare’s phony services. They further allege that Educare transferred more than $1.6 million to Globex, that Globex’s president and CEO controlled or directly participated in Educare’s scheme, and that Globex knew—or consciously avoided knowing—about Educare’s alleged misrepresentations and other illegal practices.
Based on those allegations, the FTC obtained a temporary restraining order from the federal district court in El Paso, Texas, halting the operations of Globex and freezing its assets. In granting the temporary restraining order, the court found that the FTC had sufficiently demonstrated that Globex assisted and facilitated unlawful telemarketing schemes by providing Educare with the means to call U.S. consumers via its VoIP services and facilities. According to the court, the evidence submitted by the FTC demonstrated that Globex “knew or consciously avoiding knowing” that the credit rate reduction scheme violated the Telemarketing Sales Rule.
The FTC did not hesitate to put the word out, touting the unprecedented nature of the action in a December 5, 2019, press release. The FTC then cautioned in a public blog post that “[a]ny business or individual who engages in illegal telemarketing—or who greases the wheels for others’ violations—should be aware of the breadth of liability under the [Telemarketing Sales Rule].” [Blog post]
In the case against Globex, the FTC did not have to test the limits of the Telemarketing Sales Rule’s broad “assisting and facilitating” provision. According to the FTC’s amended complaint, Globex’s owner was far from just a passive service provider—he effectively controlled the entire illegal telemarketing scheme. VoIP providers should take note, however, that the Globex precedent could be cited in future actions to pursue liability for less obviously culpable conduct.
While it is not clear to what extent the FTC will go after VoIP providers who lack actual knowledge of their customers’ unlawful practices, it is clear that the agency is increasing its focus on upstream service providers in its longstanding fight against illegal telemarketing. Companies should be attentive to warning signs that their services are being used for unlawful purposes and should not ignore suspected misconduct. Under the broad “assisting and facilitating” provision of the Telemarketing Sales Rule, willful ignorance is no excuse.
Nixon Peabody will continue to monitor developments in this case and related cases and will provide alerts on significant issues.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
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