PREPARED STATEMENT OF
Mr. Chairman, I am Jodie Bernstein, Director of the Bureau of Consumer Protection at the Federal Trade Commission. I am pleased to be here today to testify about "Web site cramming"-- the practice of causing unauthorized charges for Web site services to appear on small businesses' telephone bills. Cramming of all sorts of unauthorized charges on consumers' telephone bills has emerged in recent years as a significant problem for consumers, and Web site cramming is a specific variety mainly affecting small businesses. I will describe the practice of cramming in general, and more particularly, as it has been employed by unscrupulous operators purporting to offer Web site services. I will also describe the Federal Trade Commission's efforts to combat this new consumer protection problem.(1)
I. Introduction and Background
A. The FTC and its Law Enforcement Authority
The FTC is the federal government's primary consumer protection agency. Under the Federal Trade Commission Act,(2) the agency's mandate is to take action against "unfair or deceptive acts or practices" and to promote vigorous competition in the marketplace. The Act provides the Commission with broad law enforcement authority over virtually every sector of our economy, including business and consumer transactions on the Internet.(3) Under its statutory authority, the Commission pursues fraudulent activity through law enforcement actions in federal district courts and seeks temporary and permanent injunctive relief, as well as redress for injured consumers. The Commission has already brought a number of federal court actions against Web site crammers. I will discuss these in a moment, but will first provide some background on the problem of "cramming."
B. "Cramming" and the Telephone Billing and Collection System
Cramming is the placement of unauthorized charges on telephone bills. Cramming first emerged in the context of consumers' residential phone bills. In contrast, Web site cramming primarily affects small businesses, by causing unauthorized charges for Web site services to appear on their telephone bills. Charging consumers or small businesses for something they did not order, authorize, or buy is a perennial problem. What makes cramming unique is its use of the telephone billing and collection system to bilk the public.
Originally, the telephone billing and collection system was used only by AT&T and covered only charges for telephone service. With the break-up of AT&T, local telephone companies (known as local exchange carriers or "LECs") assumed responsibility for billing and collection, not just for their own local services, but in many cases also for the long-distance services of other vendors -- AT&T, MCI, Sprint, and other carriers. As telecommunications services proliferated, the LECs eventually began providing billing and collection for services other than basic local and long-distance telephone calls that a variety of other providers offered. These new "information" or "enhanced" products and services include voice mail, psychic lines, and adult chat lines. The charges for these services are not tariffed and not based on the transmission cost of the telephone calls involved in accessing these goods or services. In essence, the telephone billing and collection system has become an alternative to traditional payment systems, and telephone-based billing has become a potential rival to bankcards and checks.
Unfortunately, scam artists learned to take advantage of the access to this newly available alternative payment system. Scammers found many ways to bill charges to telephone numbers without the line subscriber's knowledge or consent. In some instances, charges for enhanced services were billed to telephone numbers that unwitting consumers provided when they thought they were entering sweepstakes. In other cases, con artists induced consumers to call them and then were able to bill charges to the numbers from which the calls were placed using Automatic Number Identification (ANI), a system similar to "caller ID." Consumers could not block the misuse of their telephone numbers, and the telephone billing and collection system did not have fraud prevention measures or consumer dispute procedures such as those established for payment systems using bankcards(4) or 900 numbers.(5)
Cramming complaints grew rapidly from 1996 to 1998. In 1996, the Commission received 221 cramming complaints; by 1998, this number had grown to 9,827.(6) To combat this problem, the FTC and the states took aggressive action.
The FTC filed its first cramming case in April 1998, and has since pursued a total of nine federal court actions against forty-five defendants, including those allegedly engaged in Web site cramming.(7) The FTC has pursued injunctive relief as well as redress for consumers, and in one of its largest actions, obtained $39 million in credits or refunds for cramming victims.(8) The Federal Communications Commission also launched a new "Truth in Billing" initiative, brought several administrative actions against crammers, and sponsored the LECs' efforts to develop "best practices" to discourage cramming. Meanwhile, state Offices of Attorneys General and state Consumer Affairs agencies brought over 60 actions against cramming.
II. FTC Actions Against Web Site Cramming
A. Identifying the Problem
While the FTC tackled cramming generally, we also took more precise aim at Web site cramming in particular. These Web site cramming actions are an integral part of the Commission's comprehensive program to attack Internet fraud, and thereby promote consumer confidence in the electronic marketplace. The FTC brought its first Internet case in 1994(9) and, in the ensuing five years, has brought over 100 enforcement actions against over 280 defendants engaged in deceptive or unfair practices related to the Internet, and has led collaborative enforcement efforts around the globe.(10)
In December 1998, FTC staff launched an initiative to determine the types of Internet problems affecting small businesses. Our primary tool in this effort was the Consumer Sentinel database, the largest consumer fraud database in North America. It is a joint project of the FTC and the National Association of Attorneys General and Canadian partners Canshare and PhoneBusters. Consumer Sentinel contains complaints sent via telephone, mail, and the Internet to the FTC's Consumer Response Center, as well as data submitted by a large number of United States and Canadian law enforcement agencies and private data contributors such as the Better Business Bureaus, the National Fraud Information Center and the American Association of Retired Persons. Consumer Sentinel data is accessible through a secure Internet connection by over 210 law enforcement agencies across the U.S. and Canada. It contains a historical database of over 210,000 complaints and receives approximately 2000 new Internet-related complaints per month.
Consumer Sentinel data reveal that Web site cramming is an increasingly serious problem for small businesses moving online. Prior to July 1998, the FTC had received virtually no complaints identifiable as Web site cramming; however, by March 1999, we had received over 400 such complaints from small businesses.
In the typical complaint, the small business learned of an unauthorized charge on its phone bill for "free" Web site services. These businesses were often contacted by a telemarketer touting the benefits of doing business on the Internet and offering to design and host a Web site for a "free" 30-day trial period. Some businesses were told they would not be billed until after the trial period had elapsed. Others were told they were under "no obligation" and would incur no charges unless they later ordered a Web site on a permanent basis and approved future charges. Still other businesses refused to accept the free offer and agreed only to receive an information package. In all cases, these small businesses were charged during or after their "free" trial period, even if they had declined the trial offer or canceled within 30 days.
True to the nature of cramming, these Web site charges appeared on the businesses' telephone bills. Often these charges consisted of a one time "set up fee" of $24.95 to $59.95 and a recurring monthly fee of $19.95 to $29.95. In keeping with other types of cramming victims, many small businesses did not immediately notice these charges in their lengthy phone bills -- bills that included hundreds or thousands of dollars in business calls and telephone services.
When a small businesses did notice and complain about such unauthorized charges, it was often met with a hostile response. The Web site operator typically threatened to bring a collection action and often played back verification tapes, purportedly showing that a small business had agreed to pay for its Web site services. Often the tape contained ambiguous, doctored, or incomplete snippets of the original telemarketing call. Some business owners reported that the verification tape did not contain the voice of anyone in his or her office. Other owners reported that the verification tape only included one side of the original conversation -- it did not record the telemarketer who repeatedly assured the small business customer that the Web site came with no costs or strings attached.
B. Law Enforcement Actions
In June 1999, the FTC filed three separate actions to stop the deceptive sale and billing of Web site services. In two of the cases, FTC v. Shared Network Services and FTC v. Wazzu Corporation, the Commission obtained federal court ex parte Temporary Restraining Orders ("TROs"), halting deceptive telemarketing or billing practices. In these cases, the FTC alleged that the defendants deceived small businesses by offering Web services for "free," only to turn around and charge them a set-up or monthly fee, sometimes even before the end of the trial period or even when a small business had canceled during the trial period. The FTC also alleged that the defendants used telephone bills to misrepresent that small businesses owed Web site charges that they never authorized. In the third case, FTC v. WebViper, the FTC similarly alleged that the defendants used deceptive telemarketing to pitch "free" Web site services; however, the Commission also alleged that the defendants deviated from the typical cramming pattern and deceptively billed small businesses through repeated invoices, rather than through telephone bills.
The Commission filed another Web site cramming action in July 1999 -- FTC v. Web Valley, Inc. -- and named as defendants not only the Web site company, but also two telemarketing companies. The Commission moved for and obtained an ex parte TRO. In support of its motion, the FTC presented evidence that, of the Web Valley customers that staff had contacted, over 90 percent did not know they would incur any cost and nearly 75 percent did not even know that defendants had set up a Web site for them.(11)
Finally, the Commission today announced its largest action against Web site cramming -- a stipulated final order in FTC v. U.S. Republic Communications, Inc. In this case, the FTC alleged that the defendants misrepresented: 1) that small businesses would not be charged for Web site services unless they took affirmative steps to authorize charges during a 30-day trial period; 2) that small businesses would be charged a recurring monthly charge for Web site services only after they had 30 days to review written materials and a sample site; 3) that U.S. Republic would provide Web sites that the public could easily access through major Internet search engines; and 4) that small businesses owed money for telephone charges that they had not authorized.
Without admitting these charges, U.S. Republic agreed to settle the case and enter into a final order. The order prohibits cramming and future misrepresentations about Web site services and requires U.S. Republic to notify and offer refunds to as many as 124,000 small business and organizations. As security for victims, the order requires U.S. Republic to maintain a $1.8 million letter of credit payable to the FTC during the redress process. The stipulated final order has been filed in federal district court for the Southern District of Texas and awaits the judge's approval.
The defendants in the Commission's Web site cramming cases collectively targeted approximately one million small businesses, churches, or nonprofit groups across the country. While some of these entities may have gotten what they paid for and paid for what they ordered, in too many instances, small businesses and other organizations did not receive the "free" Web site services they expected.(12)
In light of the scope of Web site cramming, several states have actively pursued the problem as well. Last spring, the Illinois Office of the Attorney General filed six separate actions against Web site cramming; Oregon officials filed two actions in June 1999; and in July, the Minnesota Attorney General coordinated its filing against Network 1000 with the FTC's filing against Web Valley. More broadly, the Attorney General offices of Illinois, Minnesota, Alabama, South Dakota, and Wisconsin, and the Wisconsin Department of Agriculture, Trade, and Consumer Protection have provided invaluable information and assistance to FTC investigators.
C. Consumer and Business Education
Although law enforcement is at the heart of our efforts, education is a key component in our campaign against general cramming and Web site cramming. In response to a sudden influx of consumer complaints about cramming in the early part of 1998, the Commission's staff developed a publication for consumers entitled, "Cramming: Mystery Phone Charges."(13) In June 1999, the Commission issued its third annual fraud report and devoted the entire publication to the problem of cramming.(14)
In an effort to better educate businesses, the FTC reached out to the Small Business Administration and the private sector and formed the Small Business Alliance for Fraud Education (SAFE). This group includes the FTC, the Small Business Administration, the Council of Better Business Bureaus, the American Chamber of Commerce Executives, the Yellow Pages Publishers Association, and the National Federation of Independent Businesses. The group's purpose is to disseminate education about Web site cramming and other schemes that may target small businesses and new entrepreneurs. The coalition issued a Business Alert in June 1999 called "Website Woes: Avoiding Web Service Scams."(15) The SAFE coalition members posted this Business Alert on each of their Web sites and linked to the Commission's Web site as well. The Business Alert contains several tips for small businesses that bear repeating:
Know your rights. If you receive bills for services you didn't order, don't pay. The law allows you to treat unordered services as a gift.
Review your phone bills as soon as they arrive. Be on the lookout for charges for services you haven't ordered or authorized.
Assign purchasing to designated staff. And document all your purchases.
The Commission recognizes that the practice of Web site cramming causes significant harm to small businesses across the country. The Commission will continue to use a variety of tactics to attack this problem: providing education to small businesses whenever possible and pursuing enforcement actions against law violators whenever necessary.
1. The views expressed in this statement represent the views of the Commission. My responses to any questions you may have are my own.
2. 15 U.S.C. § 45(a). The Commission also has responsibilities under 40 additional statutes, e.g., the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., which establishes important privacy protections for consumers' sensitive financial information; the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., which mandates disclosures of credit terms; and the Fair Credit Billing Act, 15 U.S.C. §§ 1666 et. seq., which provides for the correction of billing errors on credit accounts. The Commission also enforces over 30 rules governing specific industries and practices, e.g., the Used Car Rule, 16 C.F.R. Part 455, which requires used car dealers to disclose warranty terms via a window sticker; the Franchise Rule, 16 C.F.R. Part 436, which requires the provision of information to prospective franchisees; and the Telemarketing Sales Rule, 16 C.F.R. Part 310, which defines and prohibits deceptive telemarketing practices and other abusive telemarketing practices.
3. The activities of several specific types of entities are expressly excluded from the FTC's jurisdiction. The exclusions are: "banks, savings and loan institutions described in section 57a(f)(3) of this title, Federal credit unions described in section 57a(f)(4) of this title, common carriers subject to the Acts to regulate commerce, air carriers and foreign air carriers subject to part A of subtitle VII of title 49, and persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act, 1921, as amended (7 U.S.C.§ 181 et seq.), except as provided in section 406(b) of said Act (7 U.S.C. § 227(b))." 15 U.S.C. § 45(a)(2).
4. In bankcard systems, each cardholder has a unique card number that is not widely available to the public, and each merchant account holder must satisfy the financial and security requirements of its bankcard system and individual merchant bank. Bankcard systems monitor transactions and impose fees and restrictions on those merchants that exceed a threshold level of charge backs. Finally, the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601-1667f (as amended), requires prompt written acknowledgment of bankcard billing complaints and investigation of billing errors by creditors. TILA also prohibits creditors from taking actions that adversely affect a consumer's credit standing until an investigation is completed, and it limits a cardholder's liability for unauthorized charges to $50.
5. Several consumer protection provisions are included in the FTC's "Pay-Per-Call Rule," also known as the "900-Number Rule," 16 C.F.R. Part 308 (adopted August 9, 1993, 58 Fed. Reg. 42,400). This Rule was promulgated pursuant to The Telephone Disclosure and Dispute Resolution Act of 1992 ("TDDRA"), Pub. L. No. 102-556, 106 Stat. 4181 (1992) (codified at 15 U.S.C. § 5701 et seq. and 47 U.S.C. § 228). For those entities billing consumers through 900 numbers or other pay-per-call platforms, the Rule requires cost disclosures plus the opportunity for consumers to hang up without incurring any charge. Consumers can block access to 900 numbers and challenge unauthorized charges through an established dispute mechanism. The Pay-Per-Call Rule is currently under review by the Commission. The FCC has issued separate regulations under TDDRA governing the role of common carriers in the 900-number industry. 58 Fed. Reg. 44,773 (August 25, 1993); codified at 47 C.F.R. §§ 64.1505 - 64.1515.
6. For information about cramming complaints received by the FTC, FCC, and state authorities, see U.S. General Accounting Office, Report to the Chairman, Permanent Subcommittee on Investigations, Committee on Governmental Affairs, U.S. Senate: State and Federal Actions to Curb Slamming and Cramming 6 (July 1999).
7. FTC v. American TelNet, Inc., Civil Action No. 99-1587 CIV:KING (S. D. Fla.); FTC v. International Telemedia Assocs., Inc., Civil Action No. 1-98-CV-1935-JTC (N.D. Ga.); FTC v. Interactive Audiotext Services, Inc., Civil Action No. CV 98-3049 CBM (BQRx) (C.D. Cal.); FTC v. Hold Billing Services, Ltd., Civil Action No. SA98CA062FB (W.D. Tex.); FTC v. Crown Communications, Civil Action No. 98-7450 (S.D. Fla.); FTC v. Shared Network Services, LLC, et al., Civil Action No. CIV. S-99-1087 WBS JFM (E.D. Cal.); FTC v. Wazzu Corporation, et al., Civil Action No. SACV-99-762-AHS (C.D. Cal.) ; FTC v. Web Valley, Inc., Civil Action No. 99-1071 DSD/JMM (D. Minn.); FTC v. U.S. Republic Communications, Inc., Civil Action No. 4:99-CV-3657 (S.D. Tex.).
8. See FTC v. American TelNet, Inc., Civil Action No. 99-1587 CIV:KING (S.D. Fla.).
9. See FTC v. Corzine, Civil Action No. CIV-S-94-1446 (E.D. Cal.)(defendants, who advertised on America Online offering credit repair kits, stipulated to a permanent injunction prohibiting misrepresentations concerning credit repair programs).
10. The FTC has worked closely with international partners in individual cases and in investigational efforts. For example, in FTC v. Pereira, Civil Action No. 99-1367-A (E.D. Va.), the FTC recently collaborated with Australian officials to stop a global "page-jacking" scam. See www.ftc.gov/opa/1999/9909/atariz.htm (press release). In addition, the FTC initiated the Surf Day concept now widely used by domestic and foreign law enforcement agencies. In a typical Surf Day, the FTC and its partners surf the Internet on a designated day, looking for sites engaged in a specific type of illegal activity. Email warnings are sent to suspect sites, and they are later rechecked for compliance with the law. The FTC has coordinated or participated in seventeen such Surf Days with over 120 state, federal, or international law enforcement agencies or non-profit groups. These Surf Days have targeted problems ranging from pyramid schemes to cure-all health claims.
11. The Commission obtained preliminary injunctions in Shared Network, Web Valley and Web Viper. Litigation or settlement negotiations continue in all four Web site cramming cases filed this summer by the FTC.
12. In FTC v. Web Valley, Inc., the court sent a notice to 28,840 customers stating, "Questions have arisen about whether you have authorized Web Valley, Inc. to bill your organization either $19.95 or $24.95 on your monthly phone bill.... Please indicate whether you wish to continue being billed for internet-related services provided by Web Valley...." To date, only about one percent of these customers have stated they wish to continue being billed.
13. This publication can be found online at: www.ftc.gov/bcp/conline/pubs/services/cramming.htm
14. Federal Trade Commission, Third Annual Fraud Report, Fighting Consumer Fraud: The Case Against Cramming at www.ftc.gov/reports/Fraud/3rd/fightingconsumerfraud.htm
15. This publication can be found online at www.ftc.gov/bcp/conline/pubs/alerts/webalrt.htm