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Sweepstakes and Telemarketing Update

FTC Targets Sweepstakes Mailings that Told Recipients They Were Winners

The Federal Trade Commission filed a complaint against several Nevada companies, alleging that they violated Section 5 of the FTC Act by sending mail to millions of consumers that said the recipient had won a substantial cash prize (sometimes more than $3 million) and requiring the "winners" to send $20 to receive their prize. Some of the mailings described "uncollected" but "confirmed" prizes while other mailings said "Authorization to Disburse" and referred to a "guaranteed cash/prize amount" in the seven-figure range. Instead of receiving prizes, consumers received information about how to enter sweepstakes or information promising more prizes. The FTC is seeking a temporary restraining order, a preliminary injunction, and a freeze of the defendants' assets.

Drugstore Chain is Fined $152,000 for Limiting Sweepstakes Entries

New York Attorney General Eliot Spitzer announced that CVS agreed to pay $152,000 in civil penalties after violating a previous settlement regarding sweepstakes. The Attorney General had charged CVS with failing to provide an in-store method of entry for consumers who did not make a purchase. Consumers who visited a CVS store and purchased certain products using their CVS ExtraCare Card were automatically entered in the sweepstakes. However, CVS did not make entry forms available at all of its stores for consumers who did not purchase these products, and the company did not inform consumers how to enter the sweepstakes without a purchase. CVS settled similar charges with the New York Attorney General in 2004.

The 2004 settlement required CVS to make entry forms available at participating retail locations, conspicuously post sweepstakes rules, and ensure that staff knew how to direct consumers to non-purchase methods of entry. The new settlement will require, in addition to the previous requirements, that CVS institute an ongoing training and compliance program for management and other personnel regarding the placement of signs and entry forms in CVS stores during a sweepstakes promotion period; adopt procedures to assure that signs and entry forms are properly displayed throughout the sweepstakes promotion period; provide a copy of the settlement document to all sponsors when it engages in any game, contest, sweepstakes or promotion; and provide a copy of the settlement document to all advertising staff to assure that all advertising used in connection with any game, contest, sweepstakes or promotion sets forth with equal prominence an alternate non-purchase method of entry.

FTC Clarifies Rule on Prerecorded Messages and Proposes Amendment for Measuring Call Abandonment Rates

The FTC recently announced that it has rejected a petition submitted by the Voice Mail Broadcasting Corporation which would have allowed telemarketers to place calls delivering a prerecorded message to consumers with whom the seller has an established business relationship (EBR).

If the FTC had adopted the proposal in the petition, it would have resolved a discrepancy between the rules promulgated by the FCC pursuant to the Telephone Consumer Protection Act, which permits delivering a prerecorded sales message to consumers when an EBR exists, and the FTC's Telemarketing Sales Rule (TSR), which does not have the same exemption and which prohibits calls using a prerecorded sales message (except within the context of the call abandonment safe harbor). The FTC announced that it would begin enforcing this position on January 2, 2007.

The FTC cited several reasons for its decision including (1) widespread consumer opposition; (2) the likelihood that the EBR exemption would result in an upsurge in prerecorded telemarketing calls because of the lower cost of telemarketing; and (3) insufficient safeguards in the proposal to ensure that consumers who receive calls delivering a recorded message could assert a company-specific do not call request as easily as they could when they receive calls from an in-person sales representative.

Although certain entities are not subject to the FTC's telemarketing rules (such as financial institutions), telemarketers who are calling on their behalf are subject to the FTC's rules, so this decision will have a significant impact on those entities if they use outside telemarketers.

In the same announcement, the FTC proposed a new TSR amendment that would "make explicit that the TSR prevents sellers and telemarketers from delivering a prerecorded message when a person answers a telemarketing call, except in the very limited circumstances permitted in the call abandonment safe harbor, or when a consumer has consented, in writing, to receive such calls."

The FTC is also proposing an amendment that would change the method for measuring the maximum allowable call abandonment rate in the call abandonment safe harbor provision from "3% per day per calling campaign" to "3% per 30-day period per calling campaign."

The public comment period for these proposals ends on November 6, 2006.

This client alert is a publication of Loeb & Loeb and is intended to provide information on recent legal developments. This client alert does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations.  For more information, please contact a member of Loeb & Loeb's Advertising and Promotions Group.

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