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In an order published October 4, 2006, the Federal Trade Commission (“FTC” or “Commission”) announced its intention to begin aggressive enforcement action against telemarketers that deliver prerecorded voice messages, even where the called party has an established business relationship (“EBR”) with the caller.  Companies that use telephone sales as a marketing channel should review their compliance with the FTC’s order, which directly contradicts the telemarketing rules of the Federal Communications Commission (“FCC”).  Interested parties also should consider filing comments expressing their concerns with the order.  The FTC has set a deadline of December 18, 2006, for the filing of such comments.

Background:  FTC and FCC Rules on Use of Prerecorded Messages

Congress has authorized two agencies – the FTC and the FCC – to regulate telemarketing practices in the United States.  Those agencies have adopted telemarketing rules that are consistent in most, but not all, respects. 

One of the most important differences between the two agencies’ rules involves the use of prerecorded messages to deliver advertisements and promotions to telephone subscribers. 

The FCC’s rules on this subject are more extensive than the FTC’s and cover the use of autodialers and artificial voices as well as prerecorded messages.  According to the FCC, no call (whether for telemarketing purposes or otherwise) may be made without the called party’s prior consent using an autodialer, or an artificial or prerecorded voice, if that call will terminate at an emergency telephone line, a guest room in a hospital or similar establishment, or a wireless number or other service for which the customer is charged for the call.  There is no exception to these rules for calls made to persons with whom the caller has an EBR.

The FCC also prohibits the making of an artificial or prerecorded voice telephone call to any residential telephone line without the prior express consent of the called party.  Some exceptions to this rule apply, including noncommercial calls or, most significantly, calls to persons with whom the caller has an EBR.

The FTC’s Telemarketing Sales Rule (“TSR”) does not expressly prohibit any use of autodialers and artificial or prerecorded voices.  However, a careful reading of the TSR’s “call abandonment” provisions shows that calls that deliver prerecorded sales messages effectively are classified as unlawful “abandoned calls” under the TSR, even when those calls are made to persons with whom the caller has an EBR.  In order to understand this result, which directly contradicts the parallel regulations of the FCC, we must briefly describe the two agencies’ call abandonment rules. 

Both agencies define “abandoned calls” as calls not answered by a live sales representative within two seconds of the called person’s completed greeting.  If a sales representative is not available to speak with the person answering the call, that person must receive, within two seconds after the called person’s completed greeting, a prerecorded identification message that states only the name and telephone number of the business, entity, or individual on whose behalf the call was placed.  The identification message may not contain a sales pitch.

The agencies’ rules deal differently, however, with calls that deliver prerecorded sales messages.  The FCC rules expressly state that a call placed to someone with whom the caller has an EBR is not “abandoned” when it connects to a prerecorded sales message rather than a live representative, so long as the recording begins within two seconds of the called party’s greeting.  The FTC’s rules, however, do not contain this qualification.  As a result, the FTC rules appear to define a call that does not connect to a live representative within two seconds, even where that call delivers a prerecorded sales message within two seconds of a greeting from a person with whom the caller has an EBR, as an abandoned call.

Because of this difference in the two agencies’ rules, the FTC and the FCC both reported, in 2003, that their rules on prerecorded calls were in conflict.

In November, 2003, Voice Mail Broadcasting Corporation (“VMBC”) asked the FTC to resolve the conflict by confirming that delivery of a prerecorded message to a residential telephone subscriber with whom the caller has an EBR is permitted under the TSR. VMBC argued that by granting its petition, the FTC would conform its rules to those of the FCC without inviting the “dead air” and call hang-up problems that were the source of the call abandonment restrictions.  VMBC also argued that callers are unlikely to abuse existing customers by using prerecorded messages excessively.

The Commission asked for comments on the proposal and announced that until the proceeding was concluded, it would “forbear” from enforcement actions against marketers who delivered prerecorded messages to persons with whom they had an EBR.

The FTC’s Order of October 4, 2006

The FTC’s recent order rejects VMBC’s arguments, finding that the proposed EBR-based “safe harbor” for prerecorded calls would not serve the public interest.  Among other findings, the Commission concluded that permitting EBR-based prerecorded calls would lead to greater intrusions on consumer privacy, would interfere with consumers’ ability to make and receive health and safety-related calls, and would erode the effectiveness of the federal Do Not Call Registry.  More generally, the FTC found that encouraging wider use of inexpensive “prerecorded” telemarketing would increase commercial calling volumes and upset the “delicate balance” the Commission had struck between the privacy interests of consumers and the legitimate interests of businesses in contacting their existing customers.  (The Commission also brushed aside the argument that it should harmonize its rules with those of the FCC.)

The FTC went beyond denial of the VMBC petition, however, and proposed an amendment to its rules that would expressly prohibit “any outbound telemarketing call that delivers a prerecorded message when answered by a person, unless the seller has obtained the express agreement, in writing, of such person to place prerecorded calls to that person.”  Far from resolving the conflict between its rules and those of the FCC, the Commission proposed to carve that conflict in stone.

Finally, the FTC proposed to drop its policy of forbearance as to prerecorded sales messages delivered to persons with whom the caller has an EBR.  Accordingly, no later than January 2, 2007, the Commission will resume active enforcement of its prohibition.

What to Do Now?

Companies that deliver prerecorded marketing messages to existing customers should consider two immediate actions in response to the FTC’s recent order.

First, companies subject to FTC jurisdiction should prepare to comply with the new rule.  Although most U.S. businesses are subject to FTC regulation, some lines of business are expressly exempted from FTC jurisdiction by the terms of the Federal Trade Commission Act.  Those entities must comply with FCC, rather than FTC, regulations for purposes of telemarketing and can continue to rely upon the FCC’s more permissive rules governing the use of prerecorded messages.  Even those businesses should be aware, however, that the FTC takes an expansive view of its jurisdiction and will not hesitate to bring enforcement actions against entities that are involved in markets outside the core lines of business that are exempted from FTC authority.

Second, affected companies should consider filing comments with the FTC by the deadline of December 18, 2006.  The Commission’s order makes it clear that the FTC found the business community’s comments in support of the VMBC petition far less persuasive than the consumer comments in opposition.  The new comment round, which will focus on the FTC’s decision to adopt a new rule prohibiting most prerecorded sales messages, gives business interests another opportunity to make their case. 

The FTC’s recent decision is vulnerable to challenge on a number of grounds, including lack of support in the record, defective reasoning, and failure to demonstrate that the proposed rule’s restrictions on commercial speech will pass constitutional muster.  If commenters do not make it clear that these issues are important to them, the FTC will have no reason not to proceed with its restrictive regulations.