The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.
Pornography and other adult material is one of the biggest businesses on the Internet. Operators of websites offering such content nevertheless struggle with the fact that collecting for access to their wares can be problematic, especially with customers who are reluctant to send their credit card information off into cyberspace or who do not wish charges for such material to appear on credit card or other bills.
The remaining defendants in this case - Robert Green, Marilyn Shein, Automatic Communications Ltd. ("ACL"), and Verity International, Ltd. ("Verity") (collectively, the "defendants" or "ACL defendants") - hit upon a solution.*fn1 They offered adult content website operators a service whereby defendants arranged to have customers billed for access by including the charges on the telephone bills for the telephone lines over which the customers accessed the Internet and describing the charges as being for telephone calls to Madagascar. When some customers balked at paying often large amounts for alleged telephone calls to Madagascar, defendants and those with whom they contracted insisted that the customers were responsible for any charges incurred on their telephones and demanded payment. But there were at least two fundamental problems.
First, the individuals who subscribed to the telephone lines to which the charges were billed often neither accessed, nor authorized anyone else to access, the adult content websites. Their telephone lines were used by others. But defendants insisted on payment notwithstanding.
Second, the telephone calls were not connected to Madagascar. Defendants arranged to have the calls"short-stopped" in London, where they were connected to the websites of their clients.
The Federal Trade Commission ("FTC") brought this action, claiming in essence that defendants violated Section 5(a) of the Federal Trade Commission Act (the "FTC Act")*fn2 by (1) representing that line subscribers were liable for, and demanding payment of, charges incurred on their telephone lines irrespective of whether the line subscribers themselves accessed, or authorized others to access, the websites, and (2) issuing bills that misrepresented the services provided by describing them as telephone calls to Madagascar when in fact they were for a package including access to Internet content and telephone calls to London. The FTC seeks principally a permanent injunction prohibiting Verity, Green and Shein from engaging in any capacity in the provision of audiotext or videotext services to U.S. consumers and prohibiting ACL from billing subscribers without express authorization. The case has been the subject of several previous opinions and orders, familiarity with which is assumed.*fn3
The parties agreed to a bench trial on a stipulated record consisting of declarations, exhibits, and other evidence.*fn4 This opinion contains the Court's findings of fact and conclusions of law.
ACL and Verity are Bahamian corporations*fn5 that operated billing services for Internet pornographers.*fn6 The billing systems provided website operators with an alternative to collecting credit card information from users by engaging ACL or Verity, which in turn charged the person whose telephone line was used to connect to the Internet for access to the operator's site.*fn7
Green and Shein were founders, principals, and major shareholders of both companies.*fn8 Each held 50 percent of Verity.*fn9 Each held 40 percent of ACL until September 20, 2000, when Oriel Communications Ltd. ("Oriel"), a publicly traded Australian corporation, acquired a 50 percent interest in the company.*fn10 As a result of the Oriel acquisition, Green and Shein each owned 20 percent of ACL shares and roughly 11 percent of Oriel shares.*fn11
Green and Shein concede that they jointly controlled the acts and practices of ACL and Verity from the date the companies were incorporated up until September 18, 2000 and October 2, 2000, respectively.*fn12 Most of the companies' activities were based upon industry contacts that these two individuals developed over a ten-year period.*fn13
ACL continued operations after the Oriel acquisition in September 2000 and became the key focus of Oriel's business operations.*fn14 Verity's operations, by contrast, were short-lived. It apparently began operations just prior to the Court's issuance of a temporary restraining order in October 2000 and ceased all operations soon afterward.*fn15
B. Basic Operation of the Billing System
The billing system at the center of this litigation operated in the following way. A computer user who was logged onto the Internet through an Internet service provider ("ISP") would visit a website providing adult content.*fn16 The website would offer the user an opportunity to purchase additional web content using a dialer program.*fn17
If the user selected the dialer option, the website presented the user with a disclosure containing the terms and conditions of use.*fn18 The disclosure identified the per minute rate for access and explained that charges would appear on the line subscriber's phone bill as an international telephone charge.*fn19 If the user affirmatively agreed to these terms and conditions by clicking a box that read, in substance, "I agree" or "I accept,"*fn20 a dialer program was downloaded onto the user's computer.*fn21 The user then initiated the dialer by clicking another icon.*fn22 The dialer thereupon disconnected the user's modem from the ISP and placed a long-distance telephone call to a Madagascar telephone number.*fn23
The calls did not in fact go through to Madagascar. They were connected instead to Internet servers in the United Kingdom (i.e., the calls were "short-stopped").*fn24 The website operator then sent web content over the phone lines to the caller.*fn25 The dialer program caused the cost of accessing these services to be billed to the subscriber whose line was used to place the Madagascar phone call, regardless of whether the subscriber was the person who used the services.*fn26 The subscriber whose line was used to access the services was identified through an automatic number identification ("ANI") system, which is the system used by carriers such as AT&T to bill for ordinary phone calls.*fn27
Initially, the charges appeared on the subscribers' telephone bills as charges for longdistance calls to Madagascar.*fn28 Later, defendants sent subscribers separate bills for the services, but continued to represent that the calls terminated in Madagascar.*fn29
C. ACL Devises and Implements the Billing System
A principal point of contention between the parties is the extent of defendants' role in the billing system described above. The defendants attempt to minimize their role by assigning blame to the carriers, billing and collection agencies, information providers ("IPs") or website operators.*fn30 But the Court finds that the ACL defendants devised, implemented, and controlled the system by entering into a series of agreements with carriers, IPs, and billing and collection agents.*fn31
1. The Telecom Malagasy Agreement
The ACL billing system began to take shape in May 1997, when ACL obtained exclusive rights from Telecom Malagasy ("TM"), the official telecommunications carrier for Madagascar, to carry calls to a range of telephone numbers that had been assigned to Madagascar for international telephone connections.*fn32 The agreement authorized ACL to arrange for the carriage of traffic to those numbers, to terminate the calls at any location of ACL's choosing (including locations outside Madagascar), and to receive revenues for those calls.*fn33
The next pieces to ACL's billing system were its agreements with IPs. ACL contracted with Global Internet Billing, Inc. ("GIB"), and possibly other IPs, to market dialer billing programs that contained the phone numbers assigned to ACL.*fn34 Under an agreement with ACL dated February 23, 2000, GIB agreed to market the information services associated with the telephone numbers and to use its best efforts to generate an agreed upon volume of usage to those numbers.*fn35 ACL in turn agreed to pay GIB a fee based upon the usage minutes.*fn36 A subsequent amendment, dated March 31, 2000, provided that ACL must authorize services that used the numbers for modem dialing and granted ACL some authority to approve disclaimers.*fn37 ACL did not itself create or provide web content.*fn38
3. The Carrier Agreements
The other components to ACL's billing system were its agreements with originating carriers - first AT&T and then Sprint - to carry, bill for, and collect on the calls.*fn39 In January 1999, ACL entered into an agreement with AT&T and AT&T U.K. (later known as Viatel) for the carriage and termination of traffic to the Madagascar telephone numbers assigned to ACL.*fn40 AT&T agreed to send the calls to AT&T U.K.'s London facilities, which would accept the calls on a transit basis and forward them to ACL for termination in Madagascar.*fn41
The agreement further provided that payments be made in a "cascade arrangement."*fn42 AT&T would pay to AT&T U.K. the amounts due to both AT&T U.K. and ACL, and AT&T U.K. in turn would pay ACL.*fn43 AT&T would set prices for the calls.*fn44 ACL, Green, and Shein knew that AT&T, either directly or through local exchange carriers ("LECs"), would disseminate, attempt to collect on, and handle consumer complaints regarding bills for calls to the Madagascar numbers assigned to ACL.*fn45
In July 2000, after discovering that ACL's lines were being used to carry videotext,*fn46 AT&T promptly terminated the contract and ceased carrying calls.*fn47 ACL quickly entered into an agreement with Sprint, on July 11, 2000, for Sprint to carry, bill for, and collect on the calls.*fn48 The agreement provided that Sprint would carry the calls to ACL, which would carry, or utilize others to carry, the calls for termination in Madagascar.*fn49 Sprint would pay a portion of the monies it collected to ACL.*fn50
The Sprint agreement recognized that calls would be made using a dialer program that provided access to entertainment services. ACL there represented that it "owns internet/based [ sic ] dialer software that it licenses to third parties for entertainment services."*fn51 The agreement required ACL to incorporate into the dialer software at least two specifically-worded disclaimers, both of which would be displayed to the consumer before the Madagascar number was dialed.*fn52 The disclaimers stated, in substance, that the dialer would place a long-distance call to Madagascar that would be billed to the user's phone bill.*fn53
Although Sprint originally agreed to bill and collect for charges, it never did so. The parties entered a settlement agreement on August 16, 2000 that called for an end to the July 11 agreement on or before September 18, 2000.*fn54 The settlement agreement released Sprint from its billing and collection responsibilities, but permitted ACL to perform these activities so as long as ACL followed certain protocols.*fn55 For example, ACL agreed to charge users no more than $3.99 per minute and to use customer-friendly collection practices.*fn56 In addition, the agreement required ACL to pay Sprint a per minute transport fee.*fn57 Sprint agreed to provide ACL with the ANI information needed to identify the subscribers whose lines had been used to call the Madagascar phone numbers.*fn58
The settlement agreement stated that Sprint was induced to sign only upon ACL's warranting that the calls were actually being terminated inside Madagascar.*fn59
After Sprint declined to bill for the ACL traffic, ACL made other arrangements to bill for the calls. On August 21, 2000, Verity entered into an agreement with eBillit whereby eBillit would prepare and mail bills, collect payments, and handle consumer inquiries.*fn60 Integretel and eBillit in turn subcontracted Output Services Group ("OSG") ...