The Dangers of Interstate Telemarketing

By Jessica Andrade and Peter Ehrlichman

Imagine that you are an executive at a company with a nationwide market base. You are offered a cheap advertising option, an automatic-dialing campaign, whereby you can reach thousands of potential customers across the country in a single day with prerecorded telephone sales calls. You investigate federal statutes on the subject, and discover that such calls are generally legal so long as they are made to businesses or to individuals with whom you have a preexisting business relationship. In the space of a day, you place 30,000 calls directed into a particular state.  Months later, you receive a class-action complaint for violation of state law prohibiting pre-recorded telemarketing. Statutory damages in many states are only” $500 per call; however, your company made thousands of calls. You are facing claims of strict liability for millions of dollars, despite your best intentions and due diligence. Today, this situation is becoming all too common. Confusion and a lack of settled case law have left it unclear whether the Telephone Consumer Protection Act (TCPA), a federal statute, preempts state laws that seek to enforce conflicting regulations on interstate calls. 

Prerecorded telemarketing under the federal statutes. Currently, pre-recorded telemarketing is heavily regulated both by the Federal Communications Commission under the TCPA, and the Federal Trade Commission under the Telemarketing Sales Rule (TSR).  Each of those statutes and related regulatory regimes allow pre-recorded telemarketing to business lines. The regulations promulgated by the FTC under the TSR, most recently amended on Sept. 1, 2009, prohibit prerecorded telemarketing without the prior consent of the recipient, but specifically exempt business-to-business calls from the rule. The TCPA and accompanying FCC regulations, which apply to common carriers, such as telephone or cable companies, banks and insurance companies, appear to prohibit only pre-recorded telemarketing to residential lines.

Currently, the FCC rules promulgated under the TCPA also allow pre-recorded telemarketing to recipients with whom the caller has an established business relationship.”  The FCC, however, issued a notice of proposed rulemaking in January 2010 that would remove this exemption from the regulation.  Regardless, dozens of lawsuits are still being filed seeking to prosecute businesses for conducting prerecorded telemarketing in states that prohibit such calls, including those made businesses or recipients with whom the caller has an established business relationship.  These lawsuits fly in the face of the callers good faith reliance on federal law.

The legislative intent of the TCPA. The U.S. Congress enacted the TCPA in 1991. The purpose of the legislation, as stated by Rep. Edward Markey, was to establish [f]ederal guidelines . . . [to] fill the regulatory gap due to differences in [f]ederal and [s]tate telemarketing regulations.”  This, the Congressman suggested, would give advertisers a single set of ground rules and prevent them from falling through the cracks between [f]ederal and [s]tate statutes.”

The legislation that was passed prohibits all automatic dialing to cellular phones without express written consent or an emergency purpose, and also prohibits automatic dialing to residential lines using an artificial or prerecorded voice.”  The TCPA provides exemptions from these prohibitions for calls without a commercial purpose, calls that do not include an unsolicited advertisement, calls to recipients with whom the caller has an established business relationship, and calls made by non-profit organizations.  Aside from the TCPAs prohibitions, FCC regulations passed pursuant to the act include, but are not limited to, rules that state:

In keeping with the original legislative intent of filling in” the regulatory gap between state and federal telemarketing regulations, the TCPA also included a savings clause.”  The savings clause states in part that nothing in the TCPA shall preempt any State law that imposes more restrictive intrastate, or within the state, requirements or regulations on, or which prohibits” the use of automatic telephone dialing systems, among other things.  When considered alongside the original and overall intent of the TCPA, this provision appears to be aimed at allowing states to retain any laws concerning intrastate telemarketing that are more restrictive than the TCPA.  Plaintiffs counsel, however, have urged a different interpretation, particularly where state laws seek to regulate interstate telemarketing more restrictively than federal law. 

Preemption of state law by the TCPA. Among the first cases to test the question of whether the federal statutory authority preempted more restrictive state statutes was the 1995 decision of Van Bergen v. Minnesota, in which a Minnesota gubernatorial candidate seeking to make pre-recorded campaign calls challenged that states prohibition of any pre-recorded telephone calls without prior consent of the recipient. Van Bergen argued, among other things, that Minnesotas flat prohibition of pre-recorded calls was preempted by the TCPA. The Federal Court of Appeals for the Eighth Circuit ruled that the Minnesota statute was not preempted by the TCPA. This initial interpretation of the TCPAs preemptive effect opened the floodgates to further suits. 

Years of confusion regarding preemption of the TCPA then followed, and after multiple petitions were delivered to the FCC by businesses and states calling for clarification of the preemptive effects of the TCPA, the FCC took action. In 2003, the FCC issued an order clarifying the TCPA rules. Seeking to put the controversy of preemption under the TCPA to rest, the FCC ordered that any state regulation of interstate telemarketing that differs from the TCPA would almost certainly” conflict with and frustrate the federal regulatory scheme and thus be preempted. 

Despite the FCC Order and despite the fact that courts are required to give deference to the FCCs interpretation of a statute it is charged with administering, several state courts later ruled that that the TCPA did not preempt state laws.  In Utah Division v. Flagship Capital, the Utah Supreme Court ruled that the TCPA did not preempt Utahs law on telemarketing, either through conflict” or field” preemption. Utah law prohibits using an automatic dialing machine to place calls.  In Stenehjem v. Freeeats.com the North Dakota Supreme Court ruled that the savings clause allows states to make prohibitions of certain interstate calls to locations within its borders, and ruled that North Dakotas prohibition of all pre-recorded calls was not preempted by the federal statute.

Plaintiffs counsels have not succeeded in winning all of the battles on preemption, however. Some courts have ruled that state laws that seek to regulate interstate telemarketing more restrictively than the TCPA are preempted. In Chamber of Commerce of the U.S. v. Lockyer, the U.S. District Court for the Eastern District of California ruled that Californias telemarketing statute was preempted by the TCPA. Specifically, the court ruled that because the California statute prohibited the sending of interstate unsolicited faxes regardless of an established business relationship, the effect of the statute was preempted. 

More recently, in the U.S. District Court for the Western District of Washington, three federal judges have been called upon to decide the question: one ruled that the TCPA preempts Washingtons anti-prerecorded call statute.  In Williams v. MCIMetro Access Transmission Svcs. LLC, the court ruled that the effect of Washington States pre-recorded telemarketing statute was preempted by the TCPA in that it conflicted with the TCPAs established business relationship” exemption. The other two judges held that the Washington statute was not preempted by the TCPA.  SeePalmer v. Sprint Nextel Corp. and Hovila v. Tween Brands Inc.

Where does this legal confusion leave a business?  The difference in court opinions and courts willingness to ignore the FCC Order mean that companies simply cannot trust that only the federal TCPA will govern their telemarketing activities. This is particularly so if the companies engage in pre-recorded telemarketing to businesses, where the danger of conflict between federal and state law is most pronounced.  Given recent developments in Washington and other courts, companies should be intimately familiar with the telemarketing rules of the states into which they make pre-recorded calls.  The following is a non-exclusive list of states that either prohibit or tightly restrict pre-recorded calls:

All states provide different penalties for violations of their anti-pre-recorded calling statutes, and also proscribe multiple different regulations on how calls must be conducted. These statutes make it clear that entities engaged in pre-recorded telemarketing cannot rely on the federal statute to protect against attacks on their marketing practices. Attempts by states, under the guise of privacy concerns, to more restrictively regulate ADAD calls is resulting in patchwork enforcement activity, and significant litigation risk. Above all, businesses conducting interstate prerecorded telemarketing should consult with counsel regarding applicable state law before beginning any telemarketing campaigns even to existing business relationships” or to businesses.

Peter Ehrlichman is a partner and senior member of the Seattle trial practice and Jessica Andrade is a senior associate in the trial group at Dorsey Whitney LLP. Ehrlichman has experience defending class actions and regulatory citations, including claims involving federal and state telemarketing laws. His practice focuses in the areas of complex litigation, securities, health law, general commercial, franchise, employment, and non-competition and intellectual property, including trade secrets, computer software issues and trademarks. Andrade concentrates her practice on complex commercial disputes arising under both federal and state law. She represents corporations and individuals in lawsuits involving many issues including contract disputes, federal and state securities law, product liability, and property disputes. In addition, Andrade has experience defending corporations against class actions and regulatory citations involving federal and state telemarketing laws.