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F.T.C. v. VERITY INTERN.

December 13, 2000

FEDERAL TRADE COMMISSION, PLAINTIFF,
V.
VERITY INTERNATIONAL, LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kaplan, District Judge.

MEMORANDUM OPINION

Defendants operate a billing service for Internet pornographers. Web sites containing what defendants euphemistically refer to as adult content ascertain the telephone numbers from which visitors to the sites accessed the Internet through a system known as Automatic Number Identification ("ANI"). Defendants then bill the subscribers of those telephone numbers — who may or may not be the same persons who accessed the web sites — for access to the pornographic materials, although most of the bills here at issue described the services for which the bills were rendered as telephone calls to Madagascar. Defendants insist upon payment by line subscribers irrespective of whether the line subscribers used or authorized the use of their telephone lines to access the web sites of defendants' clients.

The Federal Trade Commission ("FTC" or "Commission") contends principally that defendants' insistence that line subscribers are legally obligated to pay for access to their clients' web sites, even where the line subscribers neither used them nor authorized such use, violates Section 5(a) of the Federal Trade Commission Act (the "Act").*fn1 The matter now is before the Court on the FTC's motion for a preliminary injunction.

Facts*fn2

Verity International, Ltd. ("Verity")*fn3 bills and collects for access to materials offered by operators of sexually oriented web sites without requiring those who access the sites to provide a credit card number over the Internet. Although the system has undergone a number of changes over time, the core concept has been constant. A computer user employs his or her modem, telephone line and normal Internet service provider ("ISP") to connect to a web site operated by a Verity client. The user then is presented with a series of screens which together purport to set forth terms and conditions of use. On the last of the screens, the user is presented with a box that states "I Agree."*fn4 If the user clicks that box, a dialer computer program is downloaded from the web site to the user's computer. The dialer program then automatically disconnects the user's computer modem from the user's ISP and reconnects the user's computer to the same web site by placing a call to an international telephone number assigned by the relevant country to a Verity affiliate, Automatic Communications Limited ("ACL").*fn5 The user then views the wares of Verity's client. Verity or an affiliate then uses the ANI system to ascertain the identity of the subscriber to whom the telephone line employed by the user is assigned, who may or may not be the user who agreed to use the web site, and bills the line subscriber for use of its client's web site, currently at the rate of $3.99 per minute.

The Original System

Verity's system dates back to approximately 1999, when ACL and its agents (including Verity) worked out an arrangement with Telecom Madagascar ("TM"), the national telecommunications carrier for Madagascar, whereby ACL was appointed TM's agent for a series of telephone numbers allocated to Madagascar by international telephone authorities. Under the appointment, TM assigned to ACL the right to receive revenues from those numbers, the right to direct that payment for calls to those numbers be made to ACL or its designee rather than to TM, and the right to terminate calls to those numbers at any location that ACL desired, even at locations outside Madagascar.*fn6

In January 1999, AT & T entered into an agreement with ACL and TM to handle call traffic to the Madagascar number range assigned to ACL and to bill the calls through regular monthly statements to customers in exchange for half of the revenue. The charges appeared on customer telephone bills as charges for telephone calls to Madagascar telephone numbers although no calls ever were put through to Madagascar.*fn7

By May 2000, ACL's call volume through AT & T had reached one million minutes per month. Although there is reason to believe that a substantial number of users refused to pay AT & T's bills for these services,*fn8 thus suggesting widespread consumer dissatisfaction, there is no need to resolve that issue for purposes of this motion.

Verity Adopts Direct Billing

In May 2000, AT & T terminated its agreement with ACL, which set out to make alternative arrangements. By July 2000, ACL had arranged to have Sprint Communications Company handle the call traffic*fn9 and, after a brief period of billing through Sprint,*fn10 it decided to bill line subscribers directly (rather than through their telephone bills) and to transfer billing responsibility to Verity. Verity in turn contracted with Integretel, Inc. ("Integretel") to prepare*fn11 and mail the bills, collect payments, and answer a toll-free "customer service" number printed on the bills. Integretel involved its subsidiary, eBillit, Inc. ("eBillit") in these activities and subcontracted the job of handling billing inquiries.*fn12

Verity began billing line subscribers on separate billing statements for use of its clients' web sites in the first week of September for July services. Shortly thereafter, it sent out a new round of bills for August. All told, it sent approximately 67,000 bills during the week of September 11 and another 44,000 bills during the following week.*fn13

At the top of the bills sent to line subscribers appeared Verity's name and the address of a non-existent post office box*fn14 in San Jose, California. The address to which payments were directed was a different San Jose post office box registered to Integretel. The bills included a summary of charges and a chart of details about them — the date, time, destination (Madagascar), telephone number called, duration and charges per call. Under the heading "INTERNET BILLING," the first page stated that "THIS BILL ACCOUNTS FOR INTERNATIONAL CALLS, FROM YOUR MODEM TO A MADAGASCAR NUMBER, FOR WEBSITE ACCESS." On the bottom right, the bill read, "For questions about your invoice please call (800) 793-1418."*fn15

Disaster Strikes

The implementation of Verity's new system was a disaster. Part of the problem, as the Verity defendants essentially admit,*fn16 was a customer service failure. Initially, only one telephone line was available for line subscribers calling the 800 number with complaints and inquiries, and it quickly was overwhelmed so that calls were dropped or placed on hold indefinitely.*fn17 Customer service personnel were not adequately trained. Many pressured callers to pay the bills or told them that they had no other option.*fn18 Others were misdirected by directory services to an entirely unrelated company in California, which in turn directed the complaints to the FTC.*fn19 Those who tried to e-mail <info@verityinternational.com> instead of calling the 800 number had no more luck in getting a response: at least one received an e-mailed description of the way the program is downloaded and a copy of a disclaimer.*fn20 But the customer service failure, in many ways, was the least of the problems.

The FTC received 548 complaints about Verity in the period September 18 through September 22, 2000.*fn21 The complaints were variations on a theme. Line subscribers said they had neither made nor authorized the calls: the computer at issue was in the line subscriber's possession and switched off at the time the calls allegedly were made;*fn22 a minor child in the household downloaded the program without authorization;*fn23 the line subscriber billed had both a 900 block and an international-call block on the line;*fn24 or the computer at issue was on-line with another web-based program at the time the call purportedly was made.*fn25 The FTC has submitted in support of this motion 81 declarations from recipients of these bills who assert that they did not access or authorize anyone to use their telephones to access the services for which Verity billed them.

Notwithstanding this evidence, the Verity defendants stoutly argue that every call for which they billed in fact was made from the line subscriber's line to the Madagascar numbers assigned to ACL and that Sprint's call records indisputably so establish. The record at this point is insufficient to determine whether this is so, but in large measure the argument is beside the point. The record is more than sufficient to establish, and the Court finds, that a significant number of line subscribers to whom Verity sent bills did not themselves use, or authorize others to use, their lines to access the services of Verity's clients, even assuming that someone else used their lines to do so. And that is the critical factual premise of the FTC's position — that these defendants have engaged in unfair and deceptive practices by billing and insisting upon payment by line subscribers even where the line subscribers did not themselves agree to pay.

Prior Proceedings

The FTC commenced this action on October 2, 2000 against Verity, its principals Robert Green and Marilyn Shein, Integretel and eBillit. The amended complaint contains three claims for relief. Counts One and Two assert that defendants' express and implied representations that line subscribers whose telephones were used to access web sites are legally obligated to pay defendants for access irrespective of whether the line subscribers actually accessed or authorized the access of the web sites are false and deceptive, and unfair, respectively, and therefore violate Section 5(a) of the Act.*fn26 Count Three contends that defendants' practice of causing charges to appear on bills as charges for calls to ...


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