Two developments this month highlight the Federal Trade Commission’s (FTC’s) enforcement of the “assisting and facilitating” prong of the Telemarketing Sales Rule, described further below.  On June 4, the FTC filed suit against Independent Resources Network Corp. (IRN), a payment processor, alleging not that the payment processor itself had engaged in deceptive and abusive telemarketing acts or practices in violation of the Telemarketing Sales Rule (TSR), but rather that it had assisted and facilitated such acts by a telemarketing company. On the heels of this complaint, the FTC announced on June 20 that the US Court of Appeals for the Tenth Circuit recently upheld a district court decision that found that an individual who had co-authored a grant-writing book had assisted and facilitated a telemarketing scheme related to the book in violation of the TSR. These cases underscore the importance of scrutinizing business relationships with companies or individuals engaged in telemarketing.

The FTC’s Telemarketing Sales Rule, which was adopted pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act, prohibits abusive deceptive telemarketing acts or practices. Violations of the TSR are punishable as deceptive acts or practices under Section 5(a) of the FTC Act. In addition to prohibiting the abusive acts of telemarketers themselves, the TSR provides that “[i]t is a deceptive telemarketing act or practice and a violation of [the TSR for] a person to provide substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in any act or practice that violates [the TSR].”

In the decision issued in FTC v. Chapman, the US Court of Appeals for the Tenth Circuit affirmed the district court’s judgment that a woman who assisted a telemarketing firm in defrauding consumers had violated the TSR. Ms. Chapman was the co-author of a grant-writing book containing misleading assertions about grant-writing success rates that was sold by telemarketers to consumers.  Although Ms. Chapman did not engage in telemarketing herself, she assisted the telemarketers in targeting the individuals who purchased the book in a variety of ways, including creating, editing, or supplying materials related to grant opportunities to assist in the telemarketing scheme, and providing grant-writing and grant-coaching services.  She also assisted the telemarketing companies in responding to inquiries from a number of state attorney general offices.  The district court found, and the Tenth Circuit affirmed, that because Ms. Chapman “played an integral part in the . . . telemarketing scheme,” that she had provided the telemarketers with substantial assistance under the TSR. Even though she was not directly involved in the “marketing efforts and thus her assistance was not directly connected to the misrepresentations made to consumers,” the court found that “this type of direct connection is not required.”  The court also found that she “knew or consciously avoided knowing,” about the misrepresentations and deceptions made by the telemarketers for a number of reasons, including her awareness of complaints made by consumers and grant funders, as well as her knowledge of investigations by the Kansas attorney general’s office. Ms. Chapman was ordered to pay approximately $1.68 million in damages, which was equal to the amount she received from the telemarketers for her services.

In an amended complaint filed in FTC v. Innovative Wealth Builders, et al., in the US District Court for the Middle District of Florida on June 4, the FTC alleged that Independent Resources Network Corp. (IRN), a payment processor, “knew, or consciously avoided knowing” that Innovative Wealth Builders (IWB), a debt relief firm that engages in telemarketing to offer credit card debt relief services to consumers with poor credit, was “engaged in violations of the TSR.”  In doing so, the FTC sent a signal that not only is it serious about prosecuting payment processors who engage in fraud, but the FTC also will hold payment processors accountable for facilitating fraud perpetrated by others.  Under the FTC’s theory, IRN, which processed IWB’s credit card payments, “knew, or consciously avoided knowing” the illegal nature of IWB’s operations, including IWB’s telemarketing practices, consumer complaints lodged against IWB, and that it was the subject of investigations by the Florida Attorney General and the FTC’s investigation into IWB.  In particular, according to the complaint, IRN continued to provide processing services for IWB despite IWB’s “alarmingly” high level of chargeback rates.  Because chargebacks are the process by which credit card holders dispute charges on their accounts, the FTC has alleged that such high rates should have tipped IRN off as to the illegal nature of IWB’s business.  Earlier this year the FTC successfully sought a temporary restraining order against IWB.  According to the FTC’s complaint, IWB would “cold call consumers and claim that [it] will reduce substantially the interest rates of consumers’ credit cards, save them thousands of dollars, and help them pay off their debits much faster.”  These services were sold for a “one-time lifetime fee” that ranged from $500 to $2000.  Consumers who purchased the services, however, did not receive any of the promised relief, and many of those who attempted to get a full refund were denied.

These two developments serve as a caution to anyone  in a business relationship with an entity that is engaged in telemarketing or is considering entering into such a relationship.  The complaint against IRN is of particular note, because unlike in FTC v. Chapman, where the defendant was providing assistance to the telemarketers that was substantively related to the fraud, in the IRN case the payment processor’s relationship to the telemarketers was more attenuated and limited solely to processing their credit card transactions.  Savvy businesses should therefore be cautious about working with telemarketers if there is even a hint that they may be engaged in deceptive or fraudulent practices.