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From Antitrust Law Daily, May 7, 2013

Grant Services Provider Was Liable for Telemarketing Sales Rule Violations for Furnishing Substantial Assistance to Telemarketing Operation

By Tobias J. Gillett, J.D., LL.M.

A provider of grant-related services was liable for FTC Telemarketing Sales Rule violations for furnishing substantial assistance to a telemarketing operation that marketed her services through misrepresentations, the U.S. Court of Appeals in Denver has ruled (FTC v. Chapman, May 7, 2013, McKay, M.). The court upheld the district court’s order against her and its denial of her motion to alter or amend the judgment or for remittitur.

In 2007, various individuals and corporations in Kansas began selling grant-related services through telemarketers to consumers. The scheme offered a book written by Meggie Chapman and another individual that contained misleading statements about the success rate of the scheme’s grant-writers and about the likelihood that consumers would receive grants.

The operation then called consumers who inquired about or purchased the book to advertise grant research services. Consumers who paid the required fee received a list of potential funding sources prepared by Chapman or her company. Many of those sources did not actually fund individuals, did not provide monetary funding, did not exist, or had requested not to be included in the lists. The operation’s telemarketing scripts also made false claims regarding their expertise and the likelihood that consumers would receive grants.

Those who purchased the grant research services would then receive calls advertising grant-writing and grant-coaching services, which Chapman helped provide. In addition, Chapman researched payment processing services, collected customer testimonials, edited some of the operation’s website content, provided a list of benefits of using a grant writer, trained telemarketers, came up with the idea to include contests in search results, and helped the operation respond to inquiries from state attorney general offices, among other aid she provided to the operation.

Approximately 80-90% of Chapman’s business came from the operation, and Chapman did not track whether any of the consumers for which she billed actually received a grant. Following an FTC complaint against the operation, Chapman began working for a Utah operation. She did not review any of the Utah operation’s marketing materials to see if they had the same problems the FTC identified in the Kansas operation. The FTC later named both the Utah operation and Chapman in an amended complaint.

A district court issued an injunction against Chapman, ordered her to pay $1,682,950 in damages, and later denied a motion to alter the judgment or for remittitur. Chapman appealed.

The court of appeals explained that it is a violation of the FTC’s Telemarketing Sales Rule "for a person to provide substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in any act or practice that violates" certain provisions of the Rule that the Kansas operation undisputedly violated.

Substantial assistance. The court found that Chapman’s actions constituted "substantial assistance" under that provision. The court observed that the FTC’s guidance did not require a direct connection such as involvement in the marketing efforts. Rather, the guidance stated that the "substantial assistance" standard would "not be met if the third party provides only ‘casual or incidental’ help to the telemarketer." By providing the services and products that the telemarketers sold to consumers in misleading ways, Chapman provided "much more than casual or incidental" assistance, in the court’s view.

The fact that Chapman’s conduct did not precisely fit into the FTC’s examples of ways in which third parties could provide assistance to telemarketers did not prevent the court from finding that Chapman provided "substantial assistance," because the "FTC and courts have not purported to create an exhaustive list of activities that establish substantial assistance." Rather, it was "sufficient that [Chapman] played an integral part in the Kansas defendants’ scheme by providing the services and products they marketed to consumers."

Knew or consciously avoided knowing. The court also concluded that Chapman knew or consciously avoided knowing about the Kansas operation’s misrepresentations. The district court had rested its conclusion on evidence that Chapman (1) knew of inquiries from the state attorneys general; (2) knew the Kansas attorney general had asked the operation to change its marketing practices; (3) received a request from a Kansas defendant’s attorney to provide names of her researchers; (4) should have been more cautious as someone new to the business of researching grants when signs indicated her results were not viable or being misused; (5) knew that the success rate in her book was unsubstantiated; (6) had been told by a former employee of the operation to be vigilant; (7) sometimes received the consumer cover letter containing claims that it was rare for a consumer not to qualify for grants; (8) should have been on notice that the operation was misleading consumers when she continued to receive requests for debt reduction relief after determining those grants were not available; (9) was on notice from complaints that grant sources in her research could not be obtained by consumers; and (10) did not provide credible or substantiated testimony about the availability of individual grants.

The court of appeals concluded the district court’s determinations were not clearly erroneous. The court found the success rate listed in her book to be "clearly a misrepresentation," and the evidence supported the conclusion that Chapman knew of the state attorneys generals’ inquiries, whether or not she believed they had been resolved. The court found that the district court did not draw impermissible inferences in concluding that Chapman had been "put on notice the Kansas defendants might be providing misleading information to consumers," and the evidence showed Chapman had never asked what the telemarketers were telling consumers. This and other evidence was sufficient for the district court to infer that Chapman "consciously avoided knowing of the Kansas defendants’ misrepresentations to consumers."

Further, Chapman’s alleged lack of actual knowledge of the misrepresentations did not alter the conclusion that she "consciously avoided knowing" of them. Chapman could easily have reviewed the marketing materials, but chose not to do so. Whether or not she actually knew of the misrepresentations, there was "ample evidence in the record to support the district court’s finding that she at least consciously avoided knowing of the misrepresentations." Therefore, the court upheld the district court’s entry of judgment against Chapman.

Denial of post-judgment motion. The court also upheld the district court’s denial of Chapman’s post-judgment motion to alter or amend the judgment or for remittitur. Chapman had argued that she only knew or avoided knowing of the misrepresentations until later in her relationship with the operation, and thus she should not be liable for the full amount that she billed the operation from the beginning of their relationship. The court explained that a motion to alter or amend a judgment may only be granted under circumstances such as a "need to correct clear error or prevent manifest injustice," and remittitur should only be granted if the award is "so excessive that it shocks the judicial conscience and raises an irresistible inference that passion, prejudice, corruption or other improper cause invaded the trial."

Here, although Chapman received more indications later, she did receive "indicators of the Kansas defendants’ improprieties early on." The court concluded that the district court did not abuse its discretion in denying Chapman’s post-judgment motion to reduce the damages.

The case is No. 11-3319.

Attorneys: M. Courtney Koger (Kutak Rock LLP) for Meggie Chapman. Michael D. Bergman for Federal Trade Commission.

Companies: Wealth Power Systems, LLC; Aria Financial, LLC

MainStory: TopStory ConsumerProtection FederalTradeCommissionNews ColoradoNews KansasNews NewMexicoNews OklahomaNews UtahNews WyomingNews

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