The FCC recently adopted an order that fined two companies, Calling 10, and Telseven, as well as the owner of both companies, Patrick Hines, $3.4 million for cramming, deceptive marketing practices, and failing to pay required fees.  The FCC concluded that Mr. Hines “personally participated” in the wrongdoing and formed “sham companies to facilitate the scheme.”  Accordingly, as the sole manager and owner of the companies, the FCC pierced the corporate veil to hold Mr. Hines jointly and severally liable for the forfeiture.

After receiving numerous complaints, the FCC conducted an investigation and determined that the companies “deceived consumers” and billed those consumers for services that were not requested or not provided (cramming).  Mr. Hines directed the companies to obtain approximately one million toll-free telephone numbers.  Some of those numbers were similar to working toll free numbers that were in-use by well know financial institutions, such as banks and credit card companies.  The FCC concluded that the toll free numbers acquired by the companies “served no apparent purpose” other than that a consumer would dial one of the companies’ toll free numbers in error.  A company name or notice that the caller reached an inactive or incorrect number was not provided when a consumer reached a Calling 10 or Telseven toll free number.  A recording directed callers to dial a 10-10 dial around code to reach directory assistance, which caused the consumer to incur a seven dollar charge from Calling 10 or Telseven.  The consumer was not asked to authorize the charge and the companies did not provide directory assistance service.

The FCC released a Notice of Apparent Liability (“NAL”) in 2012 and provided the companies with an opportunity to comment on the FCC’s findings regarding the companies’ misconduct and proposed forfeiture.  The companies did not respond to the NAL.  Mr. Hines responded to the NAL and alleged that he could not be held personally liable for the companies’ conduct.  Neither the company nor Mr. Hines denied the alleged misconduct.  Mr. Hines stated that the FCC did not use the correct standard to pierce the corporate veil because the FCC should have applied state corporate law.  He also argued that piercing the corporate veil is inconsistent with the FCC’s goal of promoting small businesses.  The FCC explained that it cannot rely on that goal when the small business “willfully and repeatedly” violated the FCC’s rules.  Lastly, Mr. Hines noted that FCC precedent for the last 80 years did not support the test used by the FCC to pierce the corporate veil.  The FCC explained that the Communications Act and court precedents “permit us to pierce the veil of a corporation to reach an individual owner who has acted to undermine the statute under which his company is regulated.”

This case is another example of the lengths the FCC will go to protect consumers from deceptive marketing practices.  Consumer protection is a high priority for the FCC.  The fines for violating the FCC’s consumer protection rules have increased significantly over the last few years.