Ruling on ATDS Capability, California Court Dismisses TCPA Suit
Siding with courts that evaluate a system’s present – not potential – capacity to store or produce telephone numbers when considering whether a system is an automatic telephone dialing system pursuant to the Telephone Consumer Protection Act (TCPA), a California federal court judge granted the defendant’s motion to dismiss.
Jordan Marks sued Crunch San Diego after allegedly receiving three unwanted text messages. The gym chain moved to dismiss the suit, arguing that it could not be liable under the statute because it did not use an ATDS. Crunch used a third-party Web-based platform to send promotional text messages, the company explained.
Phone numbers are inputted into the platform in one of three ways: when Crunch manually uploads a phone number, when a consumer responds to a Crunch marketing campaign, or when a consumer manually inputs a phone number on a consent form on the Crunch website.
To send a message, Crunch must select the desired phone numbers, generate a message, and select the date. The system then sends the texts on the given date and stores the numbers used.
But according to Crunch, the system lacks the capacity to store and call telephone numbers by using a random or sequential number generator as required by Section 227(a)(1) of the TCPA.
Electing not to rely upon commentary from the Federal Communications Commission (FCC), U.S. District Court Judge Cynthia Bashant agreed with Crunch.
The FCC’s 2012 regulations interpreted the definition of ATDS broadly to include “any equipment that has the specified capacity to generate numbers and dial them without human intervention regardless of whether the numbers called are randomly generated or come from calling lists.” But Judge Bashant said the FCC’s definition was based on policy considerations, not the plain language of the statute, and was neither binding nor convincing.
Instead, the court followed decisions defining the “capacity” of an ATDS as “the system’s present, not potential capacity to store, produce, or call randomly or sequentially generated telephone numbers,” [emphasis in the original] citing a March opinion from a Washington federal court.
According to the court, focusing on potential capacity would encompass many modern devices and potentially subject all smartphone and computer users, including any phone featuring a built-in phonebook, to TCPA liability. The court concluded that, “It seems unlikely that Congress intended to subject such a wide swath of the population to a law designed to combat unwanted and excessive telemarketing.”
The court also said the phrase “random or sequential number generator” has some limiting effect and “[i]t therefore naturally follows that ‘random or sequential number generator’ refers to the genesis of the list of numbers, not to an interpretation that renders ‘number generator’ synonymous with ‘order to be called.’”
As telephone numbers enter the Crunch system through one of only three methods that all “require human curation and intervention,” none “could reasonably be termed a random or sequential number generator” within the meaning of the TCPA.
Further, the system also did not have the potential capacity to become an ATDS, unlike the platform analyzed in a California federal court decision from earlier in the year where Yahoo’s system was deemed to be an ATDS because the company could write new software code by adding a sequential or number generator to the system.
Crunch makes use of a third-party platform that “explicitly bans inputting numbers into its system without either a response to a call to action or ‘written consent,’” the court noted. “Because Defendant’s access to the platform is limited, it similarly lacks the future or potential capacity to become an ATDS.”
The court granted Crunch’s motion for summary judgment.
To read the order in Marks v. Crunch San Diego, click here.
Why it matters: The Marks decision joins a handful of courts that have rejected the FCC’s interpretation of the TCPA and have taken a practical, commonsense approach to the question of whether a system constitutes an ATDS under the statute. While the ruling will prove valuable to defendants in California federal court for its focus on the present and not potential capacity of a platform to randomly or sequentially dial numbers, companies should note that courts in other jurisdictions remain divided on the issue.
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Bankers Group Seeks TCPA Exemption
Seeking an exemption from Telephone Consumer Protection Act (TCPA) liability, the American Bankers Association (ABA) requested that the Federal Communications Commission (FCC) allow financial institutions the ability to call or text customers on their mobile phones in the event of a data breach or other account problem.
At the root of the problem: the intersection of the TCPA, which requires prior consent to send identity theft alerts, with other laws mandating that notice be sent when possible data breaches may have occurred. Clearly it is in the bank’s interest to limit fraud and identity theft by being able to communicate with customers as quickly as possible when suspicious behavior has been detected.
Such messages “serve consumers’ interests and can be conveyed most efficiently and reliably by automated calls to consumers’ telephones, which increasingly are wireless devices,” according to the petition. Research and experience have revealed that automated communications are best suited to achieve the necessary goals, the ABA wrote, as 98 percent of text messages are opened and read within three minutes of delivery. Complicating the issue is the rising reliance by many customers on only mobile phones. One ABA member bank reported that one quarter of its customers do not subscribe to landline telephone service.
Despite the ease of such communications, “the ongoing flood of TCPA class action lawsuits” has left banks fearing potential liability. For example, at least one court has agreed with a bank customer that although he provided his number to the bank for a particular reason, he did not specifically consent to receive fraud and identity theft alerts.
The ABA requested that the Commission grant an exemption under Section 227(b)(2)(C) that would permit financial institutions to send messages in four specific categories using an automatic telephone dialing system or an artificial or prerecorded voice without prior express consent, subject to any conditions the Commission might deem necessary.
The first category: messages required to protect consumers from fraud and identity theft, a huge – and growing – area of loss. Financial institutions monitor account activity and risk factors and use algorithms to detect potential fraud, the ABA explained. But “effective fraud prevention requires the earliest possible contact with the customer,” the group wrote. “The volume of these notifications, which average 300,000 to 400,000 messages per month for one ABA member alone, cannot be accomplished with acceptable speed and accuracy unless the process is automated.”
Banks are further required to verify a customer’s identity pursuant to the Fair Credit Reporting Act before authorizing the establishment of any new credit plan or extension of credit when a fraud alert has been placed on a file, the ABA added. “Financial institutions rely on the efficiency of autodialers and other automation techniques to contact these customers quickly,” the group wrote. “For those customers who can most efficiently be contacted at mobile telephone numbers, the inability to use automated calling methods is likely to delay the bank’s ability to contact the customer, resulting in embarrassment – or worse – for those customers.”
Data security breach notifications are another major communication issue for banks. The Gramm-Leach-Bliley Act as well as 47 states and the District of Columbia require financial institutions to establish response and customer notification programs following the unauthorized access of customers’ personal information. And banks protect their customers by alerting them to data breaches, even at third-party retailers. They “deal in a high volume of data security breach notifications,” as a single financial institution might be responsible for 50,000 to 60,000 or more notifications per month, according to the ABA.
Breach notifications must be timely and reliable, the group explained to the FCC, and should be exempt as the second category of messages provided to the recipient.
The second category, remediation messages, are notices to customers concerning measures they may take to prevent identity theft resulting from a breach. They include placing fraud alerts on credit reports or subscribing to credit monitoring services. Such messages are also sent in the wake of a breach to notify customers that they will be receiving new payment cards. “The volume and frequency of these remediation notices equal those of the original breach notification messages and present a similar case for exemption from TCPA prior express consent requirements,” the ABA said.
Finally, money transfer notifications are an increasingly popular method for customers to confirm that they have received or sent money to another account. Similar to the exemption the FCC granted for package delivery notifications earlier in the year, the money transfer notifications are often delivered to persons who do not have an ongoing relationship with the sending institution and therefore have not consented to receive automated calls from that institution.
“Obtaining consent from recipients in these circumstances would be impractical and burdensome and would not serve consumers’ interests,” the group said, requesting that such notifications constitute the fourth category of the exemption.
The ABA said it would abide by any reasonable conditions placed by the FCC on an exemption and would work with wireless carriers and third-party service providers to ensure that recipients of notices are not charged for the messages. The group also proposed some conditions of its own, like identifying the name of the financial institution sending the message and including the sender’s contact information or reply instructions and promising that the messages subject to the exemption “will not contain any telemarketing, solicitation or advertisement.”
Financial institutions “will send no more automated messages than are required to complete the communications’ intended purpose,” the ABA wrote, but a single message may not always be sufficient to serve the purpose for which an organization might need to contact a consumer. For example, if a customer fails to respond to an identity theft or breach notification, the financial institution sends follow-up messages. Banks should be allowed to send a maximum of three messages per day, the ABA suggested, for each affected account and co-borrower or co-cardholder.
To read the ABA’s petition, click here.
Why it matters: The ABA’s two-pronged argument – the need to fulfill legal mandates as well as protect customers – could prove persuasive to the FCC, particularly in light of the Commission’s approval of an exemption for package delivery notifications earlier this year, the first time the agency utilized its powers under Section 227(b)(2)(C). If the Commission were to grant the group’s request, financial institutions could certainly breathe easier when sending fraud or breach notification messages.
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Absent Clear Exclusion, Insurer May Be Required to Indemnify $14M TCPA Deal
An insurer may be on the hook for a $14 million Telephone Consumer Protection Act suit, an Illinois appellate court has ruled.
The insurance dispute arose out of an underlying TCPA suit brought by Paul Idlas against Tracy’s Treasures, a company selling dating and social relationship services. Idlas filed a putative class action in March 2007 after receiving unsolicited faxed ads four years prior.
As the insured party under a number of primary and excess commercial liability policies issued by Central Mutual Insurance Company, Tracy’s Treasures tendered the complaint to the insurer. Central disclaimed coverage on several grounds but provided a lawyer as a “courtesy defense.” The insurer also filed a declaratory judgment action in state court seeking an order that it owed no duty to defend or indemnify Tracy’s.
A different lawyer filed a substitute appearance on behalf of Tracy’s and notified Central that he had been retained by the insured party in light of the conflict between Central and Tracy’s over coverage. Central consented to the substitution of counsel and paid the attorney a reasonable fee.
Even prior to writing to Central and filing an appearance with the court in the TCPA case, however, the attorney was discussing settlement with Idlas’ counsel. The parties subsequently filed a motion for preliminary approval of a settlement agreement providing for entry of a $14 million judgment against Tracy’s, enforceable only against Central’s policies. Central was not provided with notice of the deal.
In addition to providing pro rata cash payments to class members, the agreement expanded the class definition to include a period of time prior to when Idlas received his fax from Tracy’s and outside the statute of limitations applicable to TCPA claims. The updated class definition triggered an additional $5 million excess policy issued by Central.
The federal court judge overseeing the TCPA case granted final approval in May 2008.
In the declaratory judgment action, Central filed for summary judgment, arguing that neither coverage nor indemnification was required for the Idlas suit because TCPA awards constitute punitive damages. A trial court agreed.
Citing a subsequent decision from the Illinois Supreme Court that TCPA damages are not punitive in nature and insurable under state law, an appellate panel reversed.
The court also rejected Central’s contention that its policies did not cover liquidated damages such as those under the TCPA, which do not represent actual losses. Damages include all money necessary to right a wrong, the panel wrote, and the “fact that the sum is set by statute does not mean that it falls outside the definition of ‘damages.’ ”
“If Central wanted to exclude damages set by statute from the scope of its obligation to pay ‘those sums’ that Tracy’s would be required to pay ‘as damages,’ as a result of property damage or advertising injury, it could easily have done so,” the court said. “Central points to no provision of its policies that excludes such sums from the definition of ‘damages.’ ”
The court’s determination did not mean Idlas and the other plaintiffs walked away with $14 million, however.
Central reserved the right to contest coverage for the underlying settlement by filing a declaratory judgment action and did not breach its duty because it paid for Tracy’s defense, the court said. The insurer retained the right to challenge both the reasonableness of the settlement and whether the claims giving rise to the settlement were covered under its policies.
Calling for a hearing on the reasonableness of the settlement, the panel said several issues needed consideration by the trial court on remand.
Noting “strong indications” that the Idlas settlement was collusive, it noted that the trial court should evaluate relevant factors such as the reasonableness of Tracy’s decision to settle so early in the case without engaging in any motion practice.
The court also wondered whether the settlement total was an accurate assessment of the actual liability facing Tracy’s. By the time the deal was struck, the parties were aware of reduced numbers of class members likely to file a claim (less than 10,000), vastly lowering the estimated $60 million in damages (based on $1,500 willful damages for each of the estimated 40,000 class members). The court asked if the $14 million settlement was a good bargain or whether the parties could have reached a significantly lower figure with some effort.
Instead, the total amount of the settlement – $14 million – was precisely equal to the value of Central’s insurance. Perhaps the amount was a coincidence, but given facts on the record “that there was not even the illusion of adversity or arms’ lengths negotiations between counsel for Idlas and counsel for Tracy’s,” the court said the question should be considered at the reasonableness hearing.
Two other issues highlighted by the panel were the inclusion of a cy pres provision and the expanded class size. “In this context, the hypothetically prudent uninsured’s decision to settle on terms that allowed millions of dollars in anticipated residual settlement funds to be donated to charity strikes us both as extraordinarily generous and extremely helpful to class counsel’s quest for attorney’s fees,” the court wrote.
“Particularly troublesome” was the expansion of the class definition that triggered an additional $5 million of insurance coverage where the plaintiff did not even identify a class member who received a fax within the new time period. Although the existing record did not reflect any other reason for agreeing to add to the class (and potential damages) outside the statute of limitations, the appellate panel said the trial court should investigate.
To read the opinion in Central Mutual Insurance Co. v. Tracy’s Treasures, Inc., click here.
Why it matters: The Illinois appellate court’s decision has positive and negative ramifications for TCPA defendants. As an initial matter, the court relied upon the state’s highest court’s position that damages under the statute are not punitive in nature and uninsurable, holding that the insurer could be liable for indemnifying the $14 million settlement at issue. However, the panel also expressed concern about the facts and circumstances surrounding the deal itself, and remanded the case for a reasonableness hearing. TCPA defendants should take note of the terms identified as troubling by the court and steer clear. They should not agree to a settlement total in the same amount as the insurance coverage, or expand the definition of the class to reach additional insurance funds, or reach a deal at the earliest possible point in the litigation.
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TCPA “Call-Charged” Provision Applies to VoIP Service, 4th Circuit Affirms
The “call-charged” provision of the Telephone Consumer Protection Act (TCPA) applies to a residential landline for a call charge made by a Voice over Internet Protocol (VoIP) service provider, the Fourth U.S. Circuit Court of Appeals has determined.
In an unpublished opinion, the three-judge panel gave little credence to the defendant debt collector’s concerns that callers have no way of knowing whether the number they are dialing will result in a charge to the recipient that could possibly lead to TCPA liability.
Plaintiff Kevin M. Lynn sued Monarch Recovery Management, Inc., alleging violations of the TCPA, the Maryland state analogue and the Fair Debt Collections Practices Act. He claimed that Monarch made approximately 40 calls to his home number in an effort to collect debts on accounts belonging to a former resident of the home.
Lynn subscribed to VoIP service through Swiftvox, which charged for each incoming call to the number as well as the transmission of caller ID information for incoming calls. For each of the calls from Monarch to Lynn (made by an automatic telephone dialing system), he was charged $0.0149 per minute and $0.00149 for each transmission of caller ID.
As the basis for his TCPA suit, Lynn alleged that Monarch violated the statute’s “call charged” provision, 47 U.S.C. Section 227(b)(1)(A)(iii), which makes it unlawful to use an automatic telephone dialing system (ATDS) to call “any telephone number assigned to . . . any service for which the called party is charged for the call.”
Monarch moved for summary judgment, arguing that the calls should be subject to the Federal Communications Commission’s exception for debt collectors making calls to residential telephone numbers found at Section 227(b)(1)(B). The provisions of Section 227(b)(1)(A)-(D) are meant to be mutually exclusive, Monarch told the court, and the exemption for calls made by debt collectors to residential telephone lines made by an ATDS should not be ignored by applying the “catch-all” call-charged provision.
While the federal district court acknowledged that “Monarch’s interpretation is not wholly implausible, and may be more sensible given the difficulty of determining whether a called number is attached to VoIP service and thus subject to the TCPA’s call- charged provision,” the judge granted summary judgment to Lynn.
On appeal, the Fourth Circuit affirmed summary judgment for the plaintiff in a brief, unpublished per curium opinion.
“We conclude that the call-charged provision’s plain language encompasses Monarch’s calls to Lynn,” the panel wrote. “Moreover, we reject Monarch’s attempt to escape the clear breadth of the call-charged provision by relying on the FCC’s regulation excepting debt collectors from the TCPA’s separate prohibition on ‘call[s] to any residential telephone line using an artificial or prerecorded voice to deliver a message,’ and several rules of statutory interpretation. Indeed, Congress’ purpose in enacting the TCPA advises against Monarch’s effort to limit its liability.”
To read the district court opinion in Lynn v. Monarch Recovery Management, click here.
To read the Fourth Circuit decision, click here.
Why it matters: As Monarch pointed out, debt collectors have no way of knowing prior to placing a call whether the number dialed is serviced by VoIP technology that could present the possibility of liability under the TCPA. Nevertheless, the Fourth Circuit refused to consider the practical implications of defendant’s argument. Debt collectors already face limits under the statute (collection calls made using an ATDS or a prerecorded voice message cannot be made to cellphones), and the Fourth Circuit’s opinion – albeit unpublished and therefore not binding precedent – presents additional challenges when making collection calls.
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Noted and Quoted . . . Roth Called Upon by Leading Industry Publications to Discuss Impact of FCC’s Updates to the TCPA, One Year Later
October 16 marked the one-year anniversary of the Federal Communications Commission’s updates to the Telephone Consumer Protection Act, and numerous publications turned to Marc Roth, partner and co-chair of Manatt’s TCPA Compliance and Class Action Defense Group, to shed light on the impact of the rules since they went into effect.
In a Corporate Counsel article titled, “Hold the Phones: Companies on the Hook for TCPA Risks,” Marc noted that while the level of TCPA class action litigation was high this past year, it was not as much as expected for a number of reasons. Click here to read the full article.
Marc penned an article for Sports Business Journal (“Industry Faces Hurdles in Communicating with Guests by Text”) which examines recent lawsuits and settlements involving the sports industry. He noted that “the fact that the [TCPA] provides for uncapped damages and places onerous and confusing requirements on companies to get consumer consent to send messages means tough business for teams both inside and outside of the stadium.” He discussed these issues further in an interview with LawInSport, “US Sport and Consumer Protection Laws – What Sports Teams Need to Consider When Marketing to Fans.”
In addition, Marc joined colleagues Helen Pfister and Anne Karl, attorneys in Manatt’s healthcare practice, to coauthor an article for Bloomberg BNA’s Privacy and Security Law Report titled “‘Health Care’-Related Calls: Ambiguity at the Intersection of HIPAA and TCPA.” The article focuses on the TCPA exemption for “health care” messages regulated under the Health Insurance Portability and Accountability Act (HIPAA), examining the confusing intersection of the laws and implications for providers and payers. Click here to read the full article.
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