F.T.C. v. Verity Intern., Ltd.
| Citation | 443 F.3d 48 |
| Decision Date | 27 March 2006 |
| Docket Number | Docket No. 04-5487-CV. |
| Parties | FEDERAL TRADE COMMISSION, Plaintiff-Appellee, v. VERITY INTERNATIONAL, LTD., Defendant-Appellant, Automatic Communications, Ltd.; Robert Green, individually and as owner of Verity International, Ltd.; Marilyn Shein, individually and as owner of Verity International, Ltd., Defendants-Third-Party-Plaintiffs-Appellants, Integretel, Inc., a California corporation; Ebillit, Inc., a subsidiary of Integretel, Inc., Defendants, AT & T Corp., Third-Party-Defendant. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Marilyn E. Kerst (William Blumenthal and John F. Daly, on the brief; David M. Torok and Lawrence Hodapp, of counsel), Federal Trade Commission, Washington, DC, for Plaintiff-Appellee.
John J.D. McFerrin-Clancy (Jeffrey M. Eilender, on the brief), Schlam Stone & Dolan, New York, NY, for Defendant-Appellant and Defendants-Third-Party-Plaintiffs-Appellants.
Before: WALKER, Chief Judge, FEINBERG and STRAUB, Circuit Judges.
The incessant demand for pornography, some have said, is an engine of technological development. John Tierney, Porn, the Low-Slung Engine of Progress, N.Y. Times, Jan. 9, 1994, § 2 (Arts & Leisure Desk), at 1 (). The telephonic system at dispute in this appeal is an example of that phenomenon—it was designed and implemented to ensure that consumers paid charges for accessing pornography and other adult entertainment. The system identified the user of an online adult-entertainment service by the telephone line used to access that service and then billed the telephone-line subscriber for the cost of that service as if it was a charge for an international phone call to Madagascar. This system had the benefit that the user's credit card never had to be processed, but it had a problem as well: It was possible for someone to access an adult-entertainment service over a telephone line without authorization from the telephone-line subscriber who understood herself contractually bound to pay all telephone charges, including those that disguised fees for the adult entertainment.
The Federal Trade Commission ("FTC") took a dim view of this billing system and brought suit to shut it down as a deceptive and unfair trade practice within the meaning of § 5(a)(1) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. § 45(a)(1). The FTC sued Verity International, Ltd. ("Verity") and Automatic Communications, Ltd. ("ACL"), corporations that operated this billing system, as well as Robert Green and Marilyn Shein, who controlled these corporations during the relevant time period. These four defendants appeal from the district court's decision and judgment finding them liable for violating § 5(a)(1). Green and Shein also appeal from a district court order holding them in contempt of court.
The district court found the following facts upon a bench trial.
The defendants-appellants' billing system operated as follows: When a computer user visited a website providing adult-entertainment services, the website offered the user the ability to buy adult content using a downloadable "dialer program." The user downloaded the dialer program after clicking through a series of website disclosures containing the terms and conditions of use and an explanation that charges for the adult content would be billed to the telephone-line subscriber as the cost of an international phone call. The computer user then initiated the dialer program, and if the computer was connected by modem to a telephone line, the dialer program placed an international phone call to a Madagascar telephone number, bypassing the line subscriber's designated carrier in favor of AT & T and later Sprint.
Either AT & T or Sprint carried the call to London where it handed off the call to a separate carrier, AT & T U.K. (later renamed Viatel). Instead of routing the call to Madagascar for completion, AT & T U.K./Viatel carried the call to a designated internet server in the United Kingdom, a practice known as "short-stopping" the call. That internet server finalized the connection between the user's computer and the website providing the desired adult entertainment.
Charges for accessing the adult entertainment appeared on bills sent to the consumers whose telephone lines were used. AT & T and Sprint identified the telephone-line subscribers by the Automatic Number Identification ("ANI") system, the standard means by which telephone companies bill for phone calls. These bills, at first telephone bills from AT & T and later separate bills designed by Verity and sent using information provided by Sprint, charged line subscribers for long-distance phone calls to Madagascar.
Notably, this billing system did not have a mechanism to ensure that a telephone-line subscriber authorized the computer user to access a given adult-entertainment service. The absence of such a mechanism allowed line subscribers to receive bills for adult-entertainment access about which they had no knowledge, which prompted the FTC to bring this lawsuit.
In May 1997, defendant-appellant ACL contracted with Telecom Malagasy, the national telecommunications carrier for Madagascar, for (1) the right to carry calls placed to certain international telephone numbers assigned to Madagascar, (2) the right to collect charges for these calls, and (3) the right to terminate these calls at any location of ACL's choice, including locations outside Madagascar. The right to carry calls to these numbers was valuable because of the calls' high per-minute tariffed rate under U.S. telecommunications law. Revenue generated from these calls would ultimately be divided between ACL, Telecom Malagasy, various phone-call carriers, ACL's billing agents, a company that distributed the dialer program mentioned above, and various adult-website operators.
To exploit ACL's right to carry calls to these Madagascar phone numbers, ACL contracted with Global Internet Billing, Inc. ("GIB") for GIB to market the dialer program to adult-website operators and to use its best efforts to generate a minimum usage volume. ACL agreed to provide GIB with the Madagascar telephone numbers for inclusion in GIB's dialer program. ACL paid a portion of call revenues to GIB, which in turn paid the adult-website operators, effectively making GIB a paid intermediary between ACL and the website operators.
ACL also needed to arrange for the carriage of calls from a computer's modem to the U.K. internet servers that would connect the calling computer to an adult website in the United States. Accordingly, in January 1999, ACL contracted with two companies, AT & T and AT & T U.K., to carry the calls. AT & T agreed to carry calls placed to ACL's Madagascar phone numbers to the London facilities of AT & T U.K. AT & T U.K. would then carry the calls to the designated U.K. internet servers. AT & T was responsible for billing and collection for these calls, and using ANI information, AT & T billed phone-line subscribers for the ACL calls on their regular monthly telephone statements.
The content of the telephone statements received by the subscribers is relevant here. AT & T charged subscribers only the tariffed rates for phone calls to Madagascar. It listed the charges in the "Long Distance" section of the bills, with Madagascar as the "Place Called." Under the "Important Information" header, the bills stated that "nonpayment of toll charges may result in disconnection of local service, and other services may be restricted if not paid."
In the roughly-seven-month period beginning in January 2000, when adult-website operators started using ACL's system to provide adult-entertainment services to computer users, AT & T's billings for traffic to ACL's Madagascar numbers totaled $29 million, as compared to $1.6 million in total billings during the previous twelve months. At the same time, the percentage of total billings refunded to subscribers who contested their bills spiked from 8% in the previous year to 38% during this period.
ACL's contract with AT & T, together with ACL's other agreements, established a multitiered cascading-payment structure: AT & T sent to AT & T U.K. the amounts due both AT & T U.K. and ACL; AT & T U.K. then paid ACL from those funds. ACL then paid GIB, who in turn paid the adult-website operators. Each entity kept some of the money along the way. (Telecom Malagasy was compensated separately by both AT & T and ACL for providing the phone numbers.) This arrangement was in effect from January 2000 until July 2000, when AT & T terminated the contract and stopped carrying calls for ACL. The district court deemed this the "AT & T Period."
After AT & T terminated the agreement, ACL turned to Sprint as a replacement. ACL reached an agreement with Sprint which contemplated Sprint performing billing and collection functions, as AT & T did, but Sprint then quickly entered into a new agreement that released it from these duties. Under the new agreement, Sprint agreed to carry calls to the London facilities of AT & T U.K. (now renamed Viatel), but it would leave billing and collection to ACL by providing ACL with the ANI information identifying the subscribers whose telephone lines were used to call ACL's Madagascar numbers. As it did in the AT & T agreement, ACL warranted that it would receive the calls and terminate them in Madagascar. ACL agreed to pay a per-minute fee to Sprint and AT & T U.K./Viatel for serving as carriers of the phone calls. This "Sprint Period" lasted from July 2000 through September 2000, when Sprint stopped carrying calls to ACL's Madagascar phone numbers.
To handle billing and collection during the Sprint Period, ACL entered into an agreement, in Verity's name, with eBillit, Inc., a subsidiary of ...
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