Settlements Will Bar Deceptive Practices, Include $1.1 Million in Civil Penalties
Telemarketers charged with misrepresenting the costs and conditions of packages of magazine subscriptions and refusing to honor cancellation and refund requests have agreed to settle Federal Trade Commission and Department of Justice charges that their practices violated federal law. The settlement with Cross Media Marketing Corporation and its subsidiary Media Outsourcing, Inc. bars deceptive sales practices and requires the companies to monitor claims and disclosures their sales agents make. In addition, the corporations have agreed to a $1.1 million civil penalty, which is suspended upon payments totaling $350,000, based on the financial status of the corporations. The settlement with Dennis H. Gougion, an officer of the companies, similarly bars deceptive sales practices and requires him to post a $1 million performance bond if he engages in telemarketing or assists others engaged in telemarketing in any way other than performing specified publisher-seller liaison responsibilities. Gougion has agreed to a $100,000 civil penalty suspended upon payment of $10,000, based on his financial status.
In April 2002, the law enforcement agencies charged the telemarketers, who also operate under the name Consolidated Media Services or CMS, with violating federal laws by misrepresenting and failing to disclose adequately the costs and conditions of magazine subscription agreements and buying-club memberships. The named defendants include Cross Media, a Delaware corporation based in New York; Media Outsourcing, based in Atlanta, Georgia; Ronald S. Altbach, then-chief executive officer and chairman of Cross Media and president of Media Outsourcing; Dennis Gougion, a vice president; and Richard Prochnow, who previously owned and operated the magazine telemarketing business under the names Direct Sales Inc. and Magazine Sweepstakes Ltd. The complaint, filed by DOJ at the request of the FTC, also charged that the defendants failed to cancel subscriptions and pay refunds, and failed to monitor their independent sales representatives and discontinue dealing with those who were violating federal law. The complaint further alleged that Media Outsourcing, Prochnow, and Gougion were violating a previously issued FTC order prohibiting deceptive practices in selling magazines. The settlements announced today end the litigation with all the defendants except Richard Prochnow.
The complaint alleged that the defendants' telemarketers either call consumers offering free prizes and sweepstakes opportunities or send mailings soliciting consumers to call the telemarketers. Near the end of these calls, the telemarketers pitch the magazine subscription packages with allegedly misleading suggestions that the consumers will get some "free" magazines and get others at a small weekly cost. According to the documents filed in court, "Often consumers have not agreed to purchase anything, or agreed but attempt to cancel the order, yet are charged on their credit card. In addition, consumers often are billed for buying clubs after accepting what they are told is a free trial membership." The complaint alleged that neither the "free"memberships nor the "free" magazines are free. The magazine subscription "bundles" allegedly cost consumers an average of $600. The complaint further alleged that the defendants tell consumers who try to cancel magazines either during verification calls, or later when they discover misrepresentations, that they cannot not cancel.
The complaint also alleged that the defendants contact consumers, purportedly to verify a magazine package subscription, but instead offer a trial service of a buying club membership without disclosing adequately that consumers must call to cancel before the trial period expires to avoid having charges placed on their credit cards. In addition, the complaint alleged that the defendants fail to disclose adequately that they would turn consumers' credit card numbers over to a third party.
The two settlements prohibit the defendants from the following:
- Failing to disclose, clearly and conspicuously, that their calls are sales call;
- Misrepresenting the cost, duration, or purpose for which consumers' billing information will be used;
- Misrepresenting the contractual enforceability of magazine service contracts;
- Misrepresenting their cancellation policy;
- Misrepresenting that the defendants will report a consumer's failure to pay for any magazine service to a credit reporting agency, or that a consumer credit rating will be damaged;
- Failing to disclose the total number of payments and the amount of the payment before requesting any credit card or bank account information; and
- Violating the Telemarketing Sales Rule, as amended on March 31, 2003.
The two settlements require the defendants to notify consumers who agree to a "free" trial, in writing, that they will charge consumers' accounts unless they act affirmatively to avoid the charges. In addition, the settlements bar the defendants from failing to honor consumers' cancellation requests. The settlements bar the defendants from submitting negative information about consumers to credit reporting agencies if the consumers have notified them that they wish to cancel their subscription and the cancellation complies with the stated cancellation policy, or where the defendants do not possess evidence to the contrary. The settlements contain provisions to require that telemarketer subcontractors comply with the provisions of the FTC order and the TSR and to monitor their sales staff's compliance. The settlements also contain record-keeping provisions to allow the FTC to monitor the defendants compliance with the orders.
The settlement with Cross Media and Media Outsourcing further requires the telemarketers to specifically and clearly disclose to consumers the total cost, frequency, and method of payment, and requires that the defendants make audio recordings of the entire telephone conversations with consumers who agree to sign up for their magazines.
As part of the settlement with Cross Media and Media Outsourcing, and as a result of information discovered as part of the litigation, the agencies agreed to dismiss Altbach as a defendant. Altbach is required, however, for as long as he retains authority to control the companies' practices, to certify personally under oath the semiannual compliance reports the companies are required to file with the agencies.
The Commission vote to approve the stipulated final judgments and orders was 5-0. The stipulated final judgments and orders were entered in the U.S. District Court for the Northern District of Georgia on June 9, 2003.
NOTE: A stipulated final judgment and order is for settlement only and does not represent an admission of guilt. Stipulated final judgments and orders have the force of law when signed by the judge.
Copies of the complaint and stipulated final judgments and orders are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1 877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
(FTC File No.X890010)
(Civil Action No. C-3698)
Claudia Bourne Farrell,
Office of Public Affairs
Bureau of Consumer Protection