February 01, 2002

FTC Proposes New Regulation of Charitable and Association Telephone Solicitation

13 min

On January 22, 2002, the Federal Trade Commission ("FTC") proposed a number of significant changes to its Telemarketing Sales Rule ("TSR"). In addition to increasing regulation of telemarketers that sell goods and services, the proposed changes would expand the TSR to regulate and limit telephone solicitations for contributions to charities, associations and other nonprofit organizations, as well as create a national do-not-call ("DNC") list for both commercial and charitable telemarketing. This article will provide a brief overview of the existing rule and a discussion of the most significant changes proposed by the FTC relative to nonprofit organizations.

The FTC's jurisdiction over nonprofit entities is limited. The FTC can only regulate solicitations for contributions to charitable organizations that are made by commercial fundraising firms (the FTC does not have jurisdiction over charitable organizations directly). The FTC does, however, have regulatory jurisdiction over most trade and professional associations. Under the broad definition of "charitable contribution" proposed by the FTC, the TSR would cover not only contributions to charitable organizations, but also the solicitation of contributions to all nonprofit organizations by commercial fundraisers and the solicitation of contributions by most trade and professional associations directly. The proposed TSR would exclude contributions to political committees and religious organizations.

This article discusses the substantive proposals applicable to charitable and association telephone solicitations. This includes the DNC list, which would prohibit making calls to individuals and businesses who place their name and telephone numbers on the list. The proposal also would require certain disclosures to be made and would regulate the content of the solicitation. While the proposed changes to the TSR are fraught with ambiguity and uncertainty, they are not yet final. The FTC is accepting comments on the proposed changes until March 29, 2002. And during the summer, it will hold a two-day workshop. Thus, final rules will probably not be issued until this coming fall at the earliest.

I.  The Existing Rule

The existing TSR currently applies only to telemarketing calls that "induce the purchase of goods or services." It prohibits calls made after 9:00 p.m. and before 8:00 a.m. and prohibits telemarketers from calling people who have previously contacted the telemarketer and requested that they not be called (a telemarketer-specific DNC list). The TSR also requires various disclosures to be made, such as the total cost of the purchase, refund policies in certain circumstances, and any material restrictions or limitations on the purchase. Furthermore, it requires written or recorded oral authorization to charge a person's checking or savings account. The TSR also requires companies to maintain advertising brochures, name and address of customers, and other information for 24 months. The TSR exempts business-to-business calls except for those selling non-durable office goods and cleaning supplies. It also does not regulate calls made from individuals to a seller in response to a catalog or direct mail. Finally, the existing TSR creates a cause of action for state attorneys general and private individuals against telemarketers for violating the TSR.

The TSR was created after Congress passed the Telemarketing and Consumer Fraud and Abuse Prevention Act ("TCFAPA") in 1992. Its company-specific DNC list provisions mirror those of the Federal Communications Commission, which created its rules in response to the Telephone Consumer Practices Act ("TCPA") of 1994. The TCPA gives the FCC the specific authority to create a national DNC list or company-specific list. Rather than a national DNC list, the FCC chose a company-specific list approach in part because of the costs associated with a national list (estimates ranges from twenty to eighty million dollars in 1991) and anticipated consumer problems with the list.

II. Scope of the FTC's Jurisdiction Over Charities

On October 26, 2001, President Bush signed into law the USA PATRIOT Act. Enacted in response to the tragedies of September 11, most of this law is directed at combating terrorism through increased law-enforcement authority and resources. Section 1011, the "Crimes Against Charitable Americans Act," amends the TCFAPA to reach "fraudulent charitable solicitations." This section of the law, enacted in response to charitable scams arising from September 11, did not define the term "charitable." The FTC's proposed definition of charitable contribution is "any donation or gift of money or any other thing of value." The definition would exclude contributions to "political clubs, committees, or parties; or constituted religious organizations or groups affiliated with and forming an integral part of the organization where no part of the net income inures to the direct benefit of any individual, and which has received a declaration of current tax-exempt status from the United States government."

The FTC's jurisdiction, however, is limited by the FTC Act to "corporations organized to carry on business for their own profit or that of their members." The USA PATRIOT Act did not amend the jurisdictional statute and the TCFAPA itself makes clear that enforcement of the TSR is limited by the FTC's jurisdiction. Thus, the TSR cannot be enforced against those nonprofit organizations that had not previously been within the scope of the FTC's jurisdiction. In its explanation of the TSR amendments, the FTC explains that, as a result, commercial fundraisers would be subject to the TSR when conducting charitable solicitations, but the charities themselves would not.

The explanation for the proposed changes does not point out that the FTC does have jurisdiction over certain trade and professional associations. As the Supreme Court made clear in California Dental Association v. FTC, if a trade or professional association provides services to its members that enhance their profit, then the FTC will have jurisdiction over the trade or professional association. The Court noted that "an organization devoted solely to professional education may lie outside the FTC Act's jurisdictional reach, even though the quality of professional services ultimately affects the profits of those who deliver them." But, it found that because the California Dental Association provided insurance, financing arrangements, lobbying, litigation, marketing, and public relations services to its members, it directly enhanced their profit-making ability and therefore was subject to the FTC's jurisdiction. Thus, it appears that the proposed changes to the TSR that regulate "charitable contributions" would provide the FTC with direct enforcement authority over trade and professional associations that provide profit-enhancing benefits to members (which includes most trade and professional associations).

III. The Proposed Rules that Affect Nonprofit Organizations

A. Outbound Calls

Much of the TSR regulates "outbound telephone calls." Previously, outbound telephone calls were precisely that – calls originating from a telemarketer. The new rules, however, propose to include in the definition of outbound calls any calls that are "transferred to a telemarketer other than the original telemarketer" or a call that includes "a single telemarketer soliciting on behalf of more than one seller or charitable organization." Thus, if a person calls a charitable organization and the individual is transferred to a telemarketer, or if the telemarketer solicits for a second charitable organization, the call becomes an outbound call subject to the limits and prohibitions discussed below.

B. Do-Not-Call List

The existing TSR makes it an abusive telemarketing act or practice for a telemarketer to initiate an "outbound telephone call to a person who has stated that he or she does not wish to receive an outbound telephone call made by or on behalf of the seller whose goods or services are being offered." This company-specific requirement is retained. Additionally, the FTC has proposed to create and maintain a national "do-not-call registry."

Making outbound calls to people on the national list is prohibited unless the seller or charitable organization has obtained the "express verifiable authorization" of the person to receive calls. The authorization must either be written or recorded orally. Since outbound calls to persons on the national list are prohibited, oral authorization can only be obtained through an inbound call. If the authorization is written, it must include the telephone number at which the person wishes to receive such calls. If it is oral, the telemarketer must be able to "verify that the authorization is being made from the telephone number to which the consumer or donor, as the case may be, is authorizing access." Telemarketers must establish written compliance procedures, train their personnel and any entity assisting in its compliance, and maintain separate lists of people who have asked to be placed on the company-specific DNC and those who have given express authorization to receive calls despite having listed their names in the FTC Registry.

The revised TSR does not include any procedure governing how marketers are to obtain the DNC list, or how the FTC will go about creating the registry. The rule prohibits the use of any DNC list for any purpose except compliance with the TSR rules (i.e. not calling individuals on the DNC). The proposed TSR would also make it an abusive telemarketing act for telemarketers to engage in "denying or interfering in any way, directly or through an intermediary, or directing another person to deny or interfere in any way, with a person's right to be placed on" this national DNC list.

Charitable organizations over which the FTC does not have jurisdiction that conduct telemarketing with in-house callers would not be limited by the DNC provisions. Those using fundraising firms would be subject to the DNC rules. In other words, a charity that conducts its own telephone fundraising may call a person who has placed himself or herself on the DNC list, but a commercial fundraiser may not. Trade and professional associations that are subject to the FTC's jurisdiction would be required to honor the DNC for in-house telephone fundraising. The proposed regulations do not include any exception for preexisting relationships. Therefore, individuals who have contributed previously to a charity but who are on the DNC list may not be called by a professional fundraising firm. Similarly, trade and professional association members on the DNC list could not be contacted by telephone for a contribution unless they have specifically authorized the organization to contact them. Although there is a general exemption for calls to businesses, the proposed rules exclude charitable calls from that exemption.

C. Time of Calls

The existing TSR prohibits calls from sellers after 9:00 p.m. and before 8:00 a.m. The proposed rules extend this to charitable solicitations. Thus, like the DNC provisions, charities that use professional fundraisers cannot call during the restricted hours, but those doing in-house fundraising may. Similarly, certain trade and professional associations would be restricted as to the times that they can make such calls.

D. Disclosures/Misrepresentations

The TSR proposal would require charitable solicitations to identify the charitable organization on behalf of which the request is being made and that the purpose of the call is to solicit a charitable contribution. The new rule would prohibit false or misleading statements used to induce a charitable contribution. Additionally, the proposed rule prohibits making misrepresentations, directly or by implication, that relate to "the nature, purpose, or mission of the entity on behalf of which the charitable contribution is being requested," the tax deductibility of the donation, the "purpose for which the donation will be used," the percentage or amount of the contribution that will go to a charitable organization or program, material aspects of a prize promotion, and any affiliation with or endorsement by a government entity or other person. Furthermore, if the charitable solicitation includes the sale of advertising, the marketer may not misrepresent the purpose for which the proceeds will be used, that a purchase of advertising has been authorized or approved by a donor, that a donor owes payment for advertising, or the geographic area where the advertising will be distributed. 

E.  Payment Methods

The current rule requires verification for purchases made with checks, drafts or other forms of negotiable paper drawn on a checking, savings, share, or similar account. The proposed rule (which would apply to contributions as well as sales) requires "express verifiable" authorization "when the method of payment used to collect payment does not impose a limitation on the customer's or donor's liability for unauthorized charges" or does not provide for alternative dispute resolution procedures. Although this section refers to credit cards, the requirement of "express verifiable" authorization probably does not apply to credit card transactions because credit cards have a limitation of liability for fraudulent charges.

The revised rule permits express written payment authorization with the customer's signature – which may be in the form of a digital or electronic signature recognized under federal or state law. In the alternative, the telemarketer must record an oral authorization that is made available to the consumer or donor and the bank, credit card company, or other billing entity. As was previously required, the authorization must include the number, date and amount of all payments, debits or charges, the customer or donor's name, a telephone number for customer service, and the date of the oral authorization. Additionally, the proposed TSR requires the authorization recording to include the "customer's or donor's specific billing information, including the name of the account and the account number."

F. Caller ID

The TSR changes propose to prohibit "blocking, circumventing, or altering the transmission or the name and/or telephone number of the calling party for caller identification purposes." The only exception allows the telemarketer to provide the actual name of the seller or charitable organization and the customer service telephone number that is answered during regular business hours instead of the actual number used to make the call.

G. Predictive Dialers

Although the FTC does not prohibit the use of "predictive dialers" in the TSR and even though it purports to recognize the benefits to the economy that result from their use, it also discusses at some length the problem of abandonment. It states explicitly that "telemarketers who abandon calls are violating section 310.4(d)" of the TSR, which requires that the marketer "promptly and clearly" disclose the mandatory disclosures to the person receiving the call. The FTC now claims that whenever a consumer answers the phone – even when there is dead air – the consumer has received the call.

H. Pre-Acquired Account Information

The rulemaking would add a new provision to the TSR which prohibits a telemarketer from receiving "from any person other than the consumer" any consumer's "billing information." The term "billing information" is defined as "any data that provides access to a consumer's or donor's account, such as a credit card … or debit card." The prohibition applies to this pre-acquired account information only with respect to a telemarketing transaction. The proposal specifically allows transferring account information for processing an authorized payment. The proposed rule not only prohibits receiving billing information but also disclosing such information for telemarketing purposes.

The rule is somewhat ambiguous as to whether a telemarketer may reuse re-acquired account information or whether such information may be transferred between companies under common ownership or control. The proposed rule specifically prohibits "[r]eceiving [billing information] from any person other than the consumer or donor." A person is defined is as "any individual group, unincorporated association, limited or general partnership, corporation, or other business entity." Thus, the rule does not appear to prohibit a telemarketer from reusing – in an upsell or subsequent marketing campaign – pre-acquired account information that it originally obtained from the consumer because a telemarketer would not, in reusing the information, be receiving the information. On the other hand, the rule would seem to preclude transferring the information between different companies under common ownership or control if the companies have separate corporate identities.

IV. Conclusions

The proposed changes to the TSR would have a significant impact on the nonprofit community. For charitable organizations, the proposed rule would create a dichotomy between those that use in-house telephone-based fundraising and those that contract out this function. Outside fundraisers are subject to the DNC list while in-house fundraisers are not. Furthermore, most trade and professional associations would be directly subject to the TSR, including with respect to telephone solicitations of their members. Other nonprofit organizations, such as social welfare organizations exempt from taxation under Section 501(c)(4), would face the same dichotomy as charities based on whether they used in-house or external telephone fundraisers.

The proposed changes to the TSR are still at the proposal stage. The FTC is accepting comments until March 29, 2002. All interested organizations should, of course, consult the proposed rules carefully to ascertain how they would be affected by them.