In a FranCast issued last year, we reported on a case called Carolyn Anderson v. Domino’s Pizza, Inc., in which a district court dismissed a claim filed under a state version of the federal Telephone Consumer Protection Act (TCPA).   In that case, a consumer sought to hold a franchisor liable for illegal robocalls made by the franchisor’s franchisee (using a telemarketing firm).  

In dismissing the claim, the court relied on the fact that the state version did not contain the language “on whose behalf of,” which the court noted was contained in the federal version of the Act.  Franchisors have been concerned that this language in the federal Act will be used by consumers in support of allegations that a franchisor should be responsible under the TCPA for violations of the Act committed by its franchisees.

May parties on whose behalf telemarketing robocalls are made be held liable for that third party’s violations of the TCPA?  The Federal Communications Commission, the agency with authority to interpret the TCPA,  recently issued a Declaratory Ruling to answer that question. The Commission concluded that sellers who did not actually place calls may only be “vicariously” liable and subject to damages for third-party TCPA violations if federal common law principles of agency apply.

The TCPA’s restrictions on auto-dialed calls

The TCPA was enacted to regulate and monitor the use of telemarketing to consumers. Among other things, Section 227(b) prohibits calls made without consent and using “automatic telephone dialing systems” (as that term is defined in the TCPA).  Another section of the Act, Section 227(c), makes it unlawful to “initiate any telephone solicitation . . . to any residential telephone subscriber who has registered his or her telephone number on the national do-not-call registry.” Under each section, private parties may seek to recover damages and injunctive relief.  The provision authorizing the private right of action for violation of the “do-not-call” provisions contained the phrase “on behalf of,” while the provision authorizing the private right of action for violation of the “pre-recorded call” (and other) prohibitions did not contain this phrase.

The Commission’s recent ruling arises from two lawsuits involving claims that retailers were vicariously liable because they hired third parties that allegedly violated the TCPA.  At least one of the cases involved claims that the DISH Network was liable for unlawful pre-recorded calls that had been made by its dealers to telephone numbers on the national do-not-call registry.  In each case, the respective courts referred the matter to the Commission for clarification and a declaratory ruling.

The Commission rejects the expansive interpretation of the “on behalf of” language

The parties seeking to expand the scope of the TCPA argued that the “on behalf of” language should be interpreted to extend liability beyond the traditional agency principles.  They argued that, based on this language, a seller should be subject to vicarious liability for violations of both Sections 227(c) and 227(b) as long as the call is made simply to aid or benefit the seller, even if agency principles would not otherwise impose vicarious liability on the seller for the call.  However, the Commission rejected this interpretation in the context of its Declaratory Ruling, while noting that it was not precluding this interpretation with respect to the do-not-call prohibitions after an appropriate notice and comment rulemaking procedure.

The Commission’s ruling

The Commission concluded that retailers (such as franchisors) may be held vicariously liable under either Sections 227(b) or 227(c) only when federal common law agency principles apply.  Thus, vicarious liability under the TCPA, the Commission concluded, may only be imposed when there is a finding of (1) formal agency; (2) apparent authority; or (3) ratification.

The Commission expressly rejected arguments which sought to hold retailers vicariously liable simply because calls were made for the “benefit” of a retailer, whether or not agency principles would impose liability. As the Commission noted, merely “hav[ing] some role, however minor, in the causal chain that results in the making of a telephone call” will not subject a retailer to liability for the acts of third parties.  This is very significant for franchisors who consumers argued benefit from robocalls made by their franchisees (or by telemarketers on behalf of the franchisees).

The Commission provides guidance

In its ruling, the Commission provided examples of situations in which vicarious liability might be imposed, including:

  • circumstances where a seller “allows the outside sales entity access to information and systems that normally would be within the seller’s exclusive control, including: access to detailed information regarding the nature and pricing of the seller’s products and services or to the seller’s customer information”  
  • allowing an “outside sales entity to enter consumer information into the seller’s sales or customer systems, as well as the authority to use the seller’s trade name, trademark and service mark” (emphasis added)   
  • situations in which a retailer “knew (or reasonably should have known)” that a third party was violating the TCPA on the retailer’s behalf and failed to act.

Implications for franchisors

The potential implications of this Declaratory Ruling for franchisors are very significant.  While the Ruling should mean that franchisors will not be found vicariously liable under the TCPA for the unlawful robocalls made by their franchisees merely because of the “on behalf of” language in part of the TCPA, it is likely to result in consumers relying upon the traditional common law vicarious liability arguments often used against franchisors in an effort to hold them liable for their franchisee’s TCPA violations.

The Commission’s specific reference in one of its examples to allowing the sales entity to use the seller’s trademarks will certainly be cited by consumers in support of their claims.

Because of the potential damage exposure created by TCPA class actions (and much publicity has been given to those multimillion-dollar amounts), it is vitally important that franchisors review their current practices in this area, as well as the terms of their franchise agreements (particularly the independent contractor and indemnification clauses), to be in the best position to defend against any vicarious liability claims filed against them under the TCPA.