Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—EDPa: Scheme to Debit Consumer Bank Accounts for Healthcare Discount Program Violated FTC Act, Telemarketing Rule, (Apr 1, 2013)

By John W. Arden, J.D., LL.M.

Ten corporations and five individuals were jointly and severally liable for fraudulently debiting consumers’ bank accounts—purportedly for enrollment in a healthcare discount program—in violation of Section 5(a) of the Federal Trade Commission Act and the FTC Telemarketing Sales Rule, according to the federal district court in Philadelphia (Federal Trade Commission v. NHS Systems, Inc., March 28, 2013, Sanchez, J.). The defendants were permanently enjoined from telemarketing and from debiting consumer bank accounts and ordered to pay more than $6,879,000 in consumer monetary relief.

NHS Systems, Inc., Physician Health Service, LLC, and related companies (“the NHS/PHS defendants”) employed telemarketers to call consumers, attempt to enroll them in a healthcare discount program, and obtain their financial information. These programs were intended for people who did not have healthcare insurance. Typically, the telemarketers promised consumers that they would receive substantial deposits into their bank accounts—in the form of grants, tax refunds, or tax rebates—if they provided their bank account information, according to the court. Instead, the telemarketers caused the bank accounts to be debited once or multiple times.

The telemarketers would use deceptive tactics to obtain recorded “verifications” by the consumers for authority to debit their accounts. Some authorizations were forged or altered, the court found. Many consumers stated that their recordings featured imposters or were incomplete or manipulated. If a consumer complained, the NHS/PHS defendants would claim that the charges were authorized, even if there was no recorded authorization available or the recording contained another person’s voice.

The FTC took no position on the legitimacy of the underlying discount healthcare programs, but focused on the manner in which the consumers’ bank information was obtained and the way consumers were charged. The agency contended that the primary purpose of the scheme was to obtain the consumers’ financial information deceptively and to debit the accounts without authorization. The NHS/PHS defendants further misrepresented the cost of the discount program and the fact that consumers would receive a future credit to offset any debit.

In May 2008, the FTC brought suit against NHS Systems, Physician Health Service, Harry F. Bell, Jr., and Donna Newman, obtaining a temporary restraining order. However, the defendants formed new corporations and arranged a new telemarketing campaign.

The FTC amended its complaint to add the remaining NHS/PHS corporate and individual defendants. The amended complaint alleged violation of the Federal Trade Commission Act through (1) deceptive claims of government affiliation; (2) deceptive claims of government grants, tax refunds, or tax rebates; (3) deceptive claims regarding cost; (4) failure to disclose material facts; and (5) unfair unauthorized charges. It further alleged violations of the Telemarketing Sales Rule. The agency filed a motion for summary judgment. While the majority of the defendants appeared pro se, they did not respond to the motion.

FTC Act claims. The district court granted summary judgment on the FTC Act claims, finding that defendants’ conduct was unfair, as it was likely to cause substantial financial injury, and deceptive, since the defendants’ telemarketers made misrepresentations to consumers. The FTC did not have to demonstrate an intent to deceive consumers; it only had to establish that the representations were likely to mislead customers acting reasonably under the circumstances. The FTC met its burden, in the court’s view.

The telemarketers misrepresented the programs, the enrollment, the cost, and their affiliation with government agencies. These representations were material, since they would have affected the consumers’ purchasing decisions. Moreover, the consumers could have justifiably relied on the information.

Telemarketing Sales Rule claims. The Telemarketing Sales Rule requires a seller or telemarketer to truthfully disclose all material restrictions, limitations, or conditions to purchase, receive, or use goods or services that are the subject of a sales offer before a consumer consents to pay. Any misrepresentation regarding the total cost or any material characteristic of the goods or services is a violation the Telemarketing Sales Rule, as is any attempt to collect payment without the customer’s express verifiable authorization.

The undisputed facts demonstrated that the defendants violated several provisions of the Telemarketing Sale Rule, the court held. Telemarketers misrepresented the total cost of the programs. Customers were overcharged, charged without enrolling in the program, or charged to enroll in free programs. Some customers were told that they would not be charged at all or would be reimbursed. The use of audio authorization also did not comply with the Telemarketing Sales Rule, which requires a company debiting an account to maintain a record that clearly demonstrates the consumer’s authorization of payment with specific information.

Joint, several, personal liability. The defendants were jointly and severally liable for the acts and practices of other defendants because they operated the scheme as one common enterprise, the court ruled. There was a common and dependent relationship among the corporations, with overlapping actors and a common scheme. The companies shared lists of consumers, employed the same telemarketing tactics, and provided telemarketers with the same or similar scripts.

The individual defendants were liable for the corporate violations because they (1) participated directly in the deceptive acts or had the authority control them and (2) had knowledge of the misrepresentations, were recklessly indifferent to them, or were aware of a high probability of fraud along with an intentional avoidance of the truth. The individuals were involved in the establishment, management, and supervision of the corporations’ operations.

Permanent injunction. Section 13(b) of the FTC Act permits the court to grant a permanent injunction when there is a cognizable danger of recurrent violations. In this case, the court granted the FTC’s request to enjoin the defendants from making misrepresentations and violating the Telemarketing Sales Rule. It further granted the FTC’s request for a permanent injunction, banning the defendants from telemarketing and from debiting consumer bank accounts.

Some individual defendants claimed that a lifetime ban from telemarketing—their only source of income and their chosen profession—would amount to slavery in violation of the Thirteenth Amendment. The FTC argued that a strict ban from a particular industry was lawful and warranted in this case. The agency maintained that a permanent injunction would not violate the Thirteenth Amendment because the individual defendants could obtain alternative employment and were not being compelled to do anything.

The court found a ban on telemarking warranted in this case because, absent such a ban, the defendants would continue to engage in deceptive telemarketing schemes, using the same tactics they carried from one company to the next.

Monetary relief. The FTC requested that the district court exercise its power to grant equitable monetary relief by ordering the defendants to pay $6,879,162—the full amount of consumer loss. This figure was calculated by reviewing the defendants’ databases and subtracting the amount of money that had been returned. The court found these damages “reasonably approximate” to consumers’ net loss.

The case is Civil Action No. 08-2215.

Attorneys: Christopher David Panek for the Federal Trade Commission. Andrew S. Gallinaro (Conrad O’Brien) for receiver Wayne Geisser. Andrew N. Cove (Cove & Associates PA) for NHS Systems, Inc.

Companies: NHS Systems, Inc.; Physicians Health Service, LLC

Cases: ConsumerProtection Privacy PennsylvaniaNews