The Telemarketing Sales Rule outlaws a variety of deceptive practices. But liability isn’t limited just to the companies that place the calls or the marketers that hire them. It’s also illegal to “provide substantial assistance or support” to a seller or telemarketer when you know or consciously avoid knowing they’re violating the Rule. A recent decision by the United States Court of Appeals for the Tenth Circuit unpacks that portion of the TSR and upholds a district court decision in favor of the FTC, Kansas, Minnesota, North Carolina, Illinois — and consumers.
A bit of background: A group of Kansas-based defendants advertised grant-related services to consumers across the country. There were three stages to the telemarketing scheme. First, they sent out postcards offering a “guaranteed” $25,000 government grant. Consumers who called the toll-free number on the postcard were induced to buy a book, Professional Grant Writer, co-authored by Meggie Chapman. (More about her in a minute.) According to the Court, the postcards, the recorded message on the toll-free number, and the book contained misrepresentations about the likelihood that people would actually get government grant money.
One notable claim: “historically the grant writers have been able to produce a 70% success rate in receiving grant funding.” Ms. Chapman said that’s what the person who wrote that portion of the book achieved in her personal work with schools and non-profits, but the evidence showed no one ever tracked customers who bought the defendants’ books and services to see how they fared.
People who called were then contacted by telemarketers selling grant research services for between $800 and $1100. What did they get for their money? Lists of potential funding sources, many of which were prepared by Ms. Chapman. The problem was that the lists included groups that didn’t fund individuals, didn’t provide financial grants — or didn’t even exist.
Step three of the scheme: People who bought the services then got telemarketing calls pitching grant writing and coaching services, including a workshop with Ms. Chapman. But that’s not all she did. According to the Court, she researched payment processors, collected consumer testimonials, edited web content and provided material for a sample newsletter, trained telemarketers, helped formulate responses to consumer complaints, and brainstormed ways to expand the business. She also helped the companies respond to inquiries from state AGs who raised concerns about the operation. She got $1,682,950 for her services. (More about that later, too.)
After the FTC and AGs sued the Kansas companies, Ms. Chapman teamed up with Utah-based telemarketers, but didn’t bother to see if their marketing materials or telemarketing scripts had the same problems. When asked under oath if she wanted to know what the company was sending out to consumers, she responded, “You know, I really hadn’t thought about it.”
The FTC ultimately amended its complaint to name Ms. Chapman. The claims against the other defendants were settled or decided by summary judgment or default judgment, but she went to trial. Her defense: that she didn’t provide substantial assistance to the Kansas defendants and didn’t know of their misrepresentations to consumers. The trial judge wasn’t persuaded and ordered her to pay $1,682,950 — every penny she made from the operation.
On appeal, the Tenth Circuit first focused on the “substantial assistance” part of the TSR. In response to Ms. Chapman’s claim that she wasn’t involved in the marketing efforts and thus wasn’t directly connected to the misrepresentations made to consumers, the Court noted that that kind of direct connection isn’t required to establish liability. Sure, “casual or incidental” help won’t be enough (for example, cleaning telemarketers’ offices or delivering lunch), but the Court concluded that her assistance was much more than casual or incidental: "She coauthored the book that was sold in the first stage of the scheme, she provided the research results — often flawed — that were marketed in the second stage of the scheme, and she wrote grant applications and developed the workshop marketed in the third stage of the scheme. She also assisted the Kansas defendants in numerous other ways . . . ."
What about the “knew or consciously avoided knowing” part of the test? Despite Ms. Chapman’s protestations that she didn’t know what was in the direct mail materials or telemarketing scripts, the Court ruled that actual knowledge isn’t required under the “conscious avoidance” standard. “Ms. Chapman could easily have reviewed the defendants’ marketing materials to see what representations they were making to consumers.” Citing ten factual findings from the trial judge, the Tenth Circuit found ample evidence to support the conclusion that Ms. Chapman at least consciously avoided knowing of the misrepresentations. The Court upheld the ruling in favor of the FTC and the States, including the financial remedy.
The decision includes a detailed analysis of 16 C.F.R. § 310.3(b), but it can serve another useful purpose for businesses that want to stay on the right side of the law. At some point, many entrepreneurs will be faced with facts suggesting that a colleague or client is engaged in conduct best described as, well, iffy. It can be tough to be the one to show the yellow card. But to the extent telemarketing is involved, the Tenth Circuit's decision offers all the support you need that turning a blind eye can be a costly mistake.