March 31, 2006 12:07 PM PST
Police blotter: Porn-dialing firm loses appeal
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What: The Federal Trade Commission sued Verity International and other defendants, claiming a downloadable dialer program that phoned Madagascar was deceptive and unlawful. The defendants appealed their loss before a district judge.
When: The 2nd Circuit Court of Appeals in New York ruled on March 27.
Outcome: The 2nd Circuit upheld core of district court's decision.
What happened, according to the court: When an unsuspecting Internet user visited certain Web sites providing "adult entertainment services," the person was presented with the opportunity to download and execute a program that would download pornography. This practice is sometimes called a drive-by download.
Once executed, the dialer program worked by telephoning a Madagascar telephone number if a modem was attached to the computer. (The program did include a terms of service agreement that disclosed the cost of the porn was an international phone call, but it's not clear that people were reading the fine print.)
The hapless Internet user got some titillation when the modem connection was made--and a different kind of excitement when a hefty $3.99-a-minute phone bill from AT&T arrived afterward. An average bill was about $250. It warned that "nonpayment of toll charges may result in disconnection of local service."
Before Verity and Automatic Communications concocted this service, AT&T's usual billings for Madagascar traffic ran about $1.6 million a year. During the following seven-month period, however, AT&T's billings leaped to $29 million.
Sprint eventually took over the contract from AT&T. According to Sprint's billing records, 91,683 bills were sent to subscribers and at least 24,986 subscribers contacted Verity in response. Callers were placed on hold for so long that 72 percent of calls to Verity's 800 number were abandoned. Meanwhile, a recording played warning of the possibility of "further collection activity of past-due amounts."
More than 500 complaints ended up before the Federal Trade Commission, which sued, claiming that the ploy was a deceptive business practice. (For one thing, the calls actually ended up in the U.K., not Madagascar, which has international calling rates of about 8 cents a minute.)
Defendants in the FTC lawsuit included Verity International, Automatic Communications, Robert Green (an owner of Verity), Marilyn Shein (an owner of Verity). AT&T, Integretel, a California company, and its subsidiary Ebillit were also drawn into the lawsuit. Verity is not affiliated with Verity Inc. of Sunnyvale, Calif., which sells search and claim processing software.
U.S. District Judge Lewis Kaplan ruled in favor of the FTC. The 2nd Circuit affirmed all parts of his decision except a contempt order and a monetary judgment, and sent the case back to Kaplan for further proceedings.
Excerpt from 2nd Circuit's opinion: "The incessant demand for pornography, some have said, is an engine of technological development. The telephonic system at dispute in this appeal is an example of that phenomenon--it was designed and implemented to ensure that consumers paid charges for accessing pornography and other adult entertainment. The system identified the user of an online adult-entertainment service by the telephone line used to access that service and then billed the telephone-line subscriber for the cost of that service as if it was a charge for an international phone call to Madagascar.
"This system had the benefit that the user's credit card never had to be processed, but it had a problem as well: It was possible for someone to access an adult-entertainment service over a telephone line without authorization from the telephone-line subscriber who understood herself contractually bound to pay all telephone charges, including those that disguised fees for the adult entertainment...
"Either AT&T or Sprint carried the call to London where it handed off the call to a separate carrier, AT&T U.K. (later renamed Viatel). Instead of routing the call to Madagascar for completion, AT&T U.K./Viatel carried the call to a designated Internet server in the United Kingdom, a practice known as 'short-stopping' the call. That Internet server finalized the connection between the user's computer and the Web site providing the desired adult entertainment...
"The FTC alleged that the defendants-appellants engaged in a deceptive act or practice by falsely representing that a consumer could not successfully avoid charges for adult Web site content accessed over the consumer's telephone line, even if the consumer did not access the content or authorize others to do so...
"In sum, because the FTC proved all three elements of its claim premised on the deceptive representation of uncontestability, the district court did not err in holding that the defendants-appellants violated the FTC Act...
"We affirm all components of the district court's Oct. 26, 2004, final order of relief except for the monetary judgment contained therein, which we vacate. We also vacate the district court's May 2, 2001 contempt order. The case is remanded to the district court for further proceedings consistent with this opinion."
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