Thanks to the Newsletter & Electronic Publishers Association (NEPA) http://www.newsletters.org and the law firm of Levine Sullivan & Koch, L.L.P. for giving us permission to reproduce this for ContentBiz readers.

MEMORANDUM FROM COUNSEL:

This issue of Memorandum From Counsel focuses on two issues of marketing law that have been in U.S. news recently: facsimile and e-mail advertising. While the advent of electronic communication has afforded publishers these relatively efficient and inexpensive means to advertise their products and services, these forms of advertising are not without legal risk. Indeed, spurred by "privacy" advocates and, in some cases, attorneys specializing in class-action lawsuits, there has lately been a backlash against advertising by fax and e-mail. Both forms of advertising are now subject to a patchwork of sometimes conflicting federal and state laws of which publishers should be aware if they decide to market their products electronically.

Marketing By Fax

As many NEPA members already have discovered, marketing products and services over the fax machine can be very effective. Within seconds, publishers can provide a targeted audience with information about products and services for the cost of the telephone calls. And faxing avoids the recent anthrax-related postal delays, as well as the nagging problem of making an envelope enticing enough for the recipient to open.

Before implementing a fax advertising campaign, however, NEPA members should consider federal and state laws regulating this activity. The consequences of violating these laws can include both financial penalties and, in some cases, criminal sanctions.

Federal Law

All newsletter and electronic publishers who advertise via facsimile should become familiar with the federal Telephone Consumer Protection Act of 1991 (the "TCPA" or the "Act"), which, among other things, prohibits the transmission by facsimile (including fax software) of unsolicited advertisements. An "unsolicited advertisement" is defined under the TCPA as "any material advertising the commercial availability or quality of any property, goods or services which is transmitted to any person without that person’s prior express invitation or permission."

In addition, the first page of a facsimile advertisement must contain the name of the sender and the telephone number of the fax machine sending it. Recipients of fax advertisements that violate these provisions may recover their actual monetary loss or $500 per facsimile transmission, whichever is greater. Already no small penalty, this damage award may be tripled by a court if the violator is found to have acted willfully or knowingly.

An "Express Invitation" To Fax?

The FCC has provided some guidance on what qualifies as "prior express invitation or permission" to receive a facsimile advertisement, although it bears emphasis that the FCC’s rulings are not binding on the state and federal courts. The courts have yet to construe this same language (which is not defined in the TCPA itself) and the courts may ultimately reject the FCC’s guidance. In any event, in construing an analogous provision of the TCPA regulating telephone solicitations, the FCC has declared that, if the caller has an "established business relationship" with the recipient of the call, the sender is deemed to have express permission to contact that person. At least arguably, the same principle holds true in the context of facsimile solicitations. The FCC has defined an "established business relationship" as:

A prior or existing relationship formed by a voluntary two-way communication between a person or entity and a residential subscriber with or without an exchange of consideration, on the basis of an inquiry, application, purchase or transaction by the residential subscriber regarding products or services offered by such person or entity, which relationship has not been previously terminated by either party.

It would appear that, under this rule, sending fax advertisements to existing subscribers (at least those who have not otherwise indicated that they do not consent to receiving faxes) presents the least legal risk under the TCPA. Beyond that, however, many other questions remain. Do publishers have an "existing business relationship" with former subscribers? The FCC’s reference to relationships "previously terminated" arguably could be read to exclude former subscribers. Is a sufficient relationship established when a person gives a publisher a business card? Does someone invite solicitations from a company when that person enters the company’s contest to win a free trip? Are publishers off the hook if the recipient is a business and not a "residential subscriber"? Regrettably, current law does not always provide clear answers to these questions. Until the courts or Congress provide more precise guidance, the most conservative course is, obviously, to obtain written permission before faxing.

The TCPA is both broad in scope and, so far, relatively resistant to legal challenge. At least one court has held that officers and sole shareholders of incorporated businesses may personally be liable for violations. Not-for-profit organizations are equally subject to the Act. The Act permits individuals, entities and state attorneys general to bring suit under its provisions against violators "if otherwise permitted by the laws or rules of court of a State." The majority of courts have interpreted this phrase broadly to permit suit in various state courts under the TCPA. Other legal challenges, including an equal-protection challenge based on the individual states’ choice of whether to permit TCPA suits in their courts and a due-process challenge to the $500 statutory penalty, also have failed thus far in those courts that have addressed the issues.

In addition, several courts recently have considered arguments that the prohibition on unsolicited fax advertising is an unconstitutional restriction on commercial speech. Most courts have concluded that the prohibition does not run afoul of the First Amendment. However, in March a federal district court in Missouri reached a contrary conclusion, holding that the prohibition was unconstitutional because Congress had not sufficiently justified the need for such a sweeping ban. The Justice Department, which intervened in the district court to defend the TCPA, immediately announced that it will appeal the decision. The district court’s ruling is not binding on other courts in the meantime.

Finally, no court appears to have addressed the issue of whether the TCPA reaches, in whole or in part, the transmission of facsimile advertisements sent to residents of the United States from foreign countries. For example, could an American company hire a Canadian facsimile advertiser to send unsolicited solicitations to U.S. consumers without the American or Canadian companies risking liability? For its part, the FCC recently concluded, in the context of a $1 million forfeiture order against a British-based company, that the TCPA does govern unsolicited advertisements originating from fax machines physically located outside of the United States. The FCC interpreted the TCPA to prohibit "the faxing of unsolicited advertisements either to or from the United States" by any entity with a U.S. presence, including "the corporate entity on whose behalf [the faxer] is acting." Generally, publishers should tread with caution here given the FCC’s position, unless and until the courts clearly hold otherwise.

Recent Lawsuits Brought Under The TCPA

As reported in the August 13, 2001, issue of Hotline, a Hooters restaurant in Augusta, GA, recently filed for bankruptcy protection in the wake of a $12 million judgment entered against it in a class action TCPA lawsuit. Hooters sent fax advertisements, through a third party hired to do so, to hundreds of persons. Lawyers filed a class-action lawsuit on behalf of the 1,321 recipients, each of whom received six fax advertisements from Hooters. Hooters initially tried to have the lawsuit dismissed on the grounds that it was the third party, not Hooters, who actually sent the facsimile transmissions, and that the TCPA prohibits only interstate transmissions, not transmissions within a single state, as occurred in Hooters’ case. A Georgia appeals court rejected these arguments, as have other courts, paving the way for trial, where a jury ultimately held that Hooters violated the Act. The plaintiffs opted to receive statutory damages, which amounted to $4 million. Because the jury also found that Hooters had knowingly violated the law, the judge had discretion to triple this amount, and did so.

Another Faxer Blasted

On the heels of this decision came another large judgment arising from unlawful facsimile advertising in Texas. Last August, a federal district court awarded the Texas attorney general a $465,000 judgment against American BlastFax, which sent more than two million unsolicited faxes on behalf of an advertiser who hired it to do so. Although an opinion issued by the FCC in 1995 indicates that "the entity or entities on whose behalf facsimiles are transmitted are ultimately liable for compliance with the rule banning unsolicited fax advertisements, and that fax broadcasters are not liable for compliance with this rule," the court held that the FCC’s interpretation of the Act was too narrow and that the statute applied to fax advertising service providers, as well.

This damage award could have been much higher under the terms of the Act. Holding that an award based on $500 per transmission in that case would be "inequitable and unreasonable" to impose upon two individuals and a 15-employee company, the court instead determined the amount of the award based on the actual cost of each unwanted fax page, which was seven cents. Had the court actually held the defendants liable for $500 per transmission, the judgment would have exceeded $2.5 billion.

These significant judgments no doubt played a role in the successful extraction of a settlement from the Dallas Cowboys in a class-action lawsuit last December. The Cowboys agreed to pay $1.73 million to plaintiffs who brought suit based on an advertisement sent to 125,000 locations by a telemarketing company hired by the Cowboys.

These recent developments in the courts suggest that the practice of mass fax advertising has spawned a cottage industry for plaintiffs’ class action lawyers who bring suits on behalf of hundreds or thousands of recipients of a single advertisement. As the FCC received 778 fax advertising complaints between April and October last year, its first year tracking such complaints, the number of such lawsuits is likely to increase dramatically. Indeed, several NEPA members already have been investigated by regulatory agencies and sued by private plaintiffs over their fax-advertising practices.

State Laws

In addition to the TCPA, fax advertising may also be subject to state laws governing such transmissions. By its explicit language, the TCPA was not intended to preempt state efforts to regulate fax advertising. As a result, states may impose even greater restrictions on fax advertising. At least 28 states have statutory provisions regulating the sending of unsolicited advertisements by facsimile:

California Colorado
Connecticut Florida
Georgia Idaho
Illinois Louisiana
Maine Maryland
Michigan Minnesota
Nebraska Nevada
New York North Carolina
North Dakota Oregon
Oklahoma Rhode Island
South Carolina
Tennesee
Texas Utah
Virginia West Virginia
Washington Wisconsin


These states impose various remedies for violations. Most permit individuals to bring suit, and many have liquidated damage provisions, like the TCPA, ranging from $100 to $1,000 per transmission. Some states impose criminal penalties for violations, including heavy fines and even jail time.

Unfortunately, the requirements imposed upon the fax advertiser by these statutes vary dramatically from state to state. Some states, such as California, Colorado and Minnesota, appear to permit the sending of unsolicited advertisements so long as the advertisements include a statement informing the recipient of a toll-free number that the recipient may call to request that the sender cease sending unsolicited advertisements, and the sender abides by the recipients’ expressed wishes. Other states, like Connecticut, have adopted regulatory schemes more like the federal TCPA, imposing a wholesale prohibition on the sending of unsolicited advertising material by facsimile.

State Rules On Consent Differ

Within these categories of statutes, some include language expressly excepting the situation where there is an existing business or contractual relationship; others do not. Still others require, instead, "consent" from the recipient. Washington’s prohibition apparently extends to governmental recipients even where there is an existing business relationship. In Oregon, an advertiser apparently may begin sending advertisements to a recipient again one year after the advertiser received notice of the recipient’s desire not to receive such advertisements.

The kind of transmissions covered differs from state to state as well. While some states, such as Florida, appear to limit their laws to intra-state transmissions only, most state statutes contain no such limitation. Illinois and Maine appear to have extended their statutes to cover facsimiles used for fund-raising purposes. North Carolina’s law only applies to the "solicitation or negotiation for credit insurance on credit-card account balances."

Some of these statutes regulate other aspects of the advertisements, as well, such as font size, placement of "opt-out" notices and the timing of the transmission. For example, New York exempts transmissions of five pages or less received between 9:00 P.M. and 6:00 A.M. local time unless the recipient has notified the sender of it's desire not to receive such transmissions. North Dakota’s law contains a similar provision, but the facsimile may not exceed two pages, and Oklahoma’s law is similar to North Dakota’s, yet is restricted to the undefined period of "after normal business hours." In Wisconsin, any permissible transmissions must be no longer than one page in length and must occur between 9:00 P.M. and 6:00 A.M. Texas, on the other hand, appears to prohibit fax advertisements sent from 11:00 P.M. to 7:00 A.M.

In short, state laws governing advertising by facsimile come with numerous variations, sometimes imposing requirements that appear to directly conflict with the laws of other states. In this environment, the most prudent course for NEPA members wishing to advertise by facsimile would be to consult the laws of each state into and from which they expect to send such advertisements before doing so.

Marketing By E-mail

Unlike advertising by facsimile, e-mail advertising is not specifically regulated by federal law. To some extent, that is good news because it means there is no overarching federal law prohibiting unsolicited commercial e-mails that plaintiffs can use as a vehicle for multi-million-dollar class-action lawsuits, as they have done successfully in the area of unsolicited facsimile advertising.

The absence of a federal law regulating e-mail advertising, however, may not last long. Opponents of e-mail advertising derisively refer to it as "spam," a moniker that derives from a Monty Python skit about a couple at a restaurant trying to order dinner while a chorus of Vikings incessantly sings about the processed meat product Spam, effectively drowning out all other conversation. Opponents of such e-mail contend that it is a similar nuisance and they have been pushing hard in Congress for legislation to limit it. E-mail advertising opponents have been aided in no small part by the barrage of advertisements for certain products, mostly of a risqué nature, that e-mail account owners have become accustomed to deleting on a regular basis. According to some research estimates, Internet users received an average of 570 unsolicited messages in 2001 and the number is expected to dramatically increase over the next several years.

Indeed, many professional marketers and marketing trade groups worry that consumers who believe themselves to be under siege by unwanted e-mail advertising messages will simply tune out all commercial e-mail, even those messages advertising goods and services in which the recipient might truly be interested.

Federal Efforts To Regulate E-Mail Ads

In 2000, the House of Representatives approved a bill that would have required unsolicited commercial e-mail to be labeled as such. Recipients would have been entitled to notice of the right not to receive future messages from the sender and, after receiving such notice from a recipient, sending another e-mail would have been prohibited. In addition, under the House bill recipients would have been authorized to sue e-mailers who violated the prohibition.

The provision for such a private right of action proved controversial because it included a right for plaintiffs to recover their attorneys’ fees, a feature that likely would encourage attempts to bring class actions to enforce the prohibitions. In part because of this controversial issue, the Senate has declined to consider the bill passed by the House and no new legislation has been able to garner widespread congressional support since. But several bills that would regulate e-mail advertising are currently pending in the Congress, and many observers on Capitol Hill believe it is only a matter of time until a compromise measure emerges from Congress and is signed by President Bush.

In the meantime, federal regulators are not without weapons to combat e-mail advertising, or at least that subset of it that is found to be fraudulent or deceptive under regulations applicable to advertising generally.

The FTC has promised to aggressively pursue fraud cases related to e-mail. Since September 2000, it has issued more than 3,000 warnings about allegedly illicit online ventures. "We’re going after deceptive spam and the people who send it," said Timothy Muris, chairman of the FTC. "We want it off the Net."

Indeed, some e-mail advertisers are now voluntarily including language in their advertisements to the effect that the e-mail is already in conformity with proposed federal legislation. This disclaimer typically observes that the e-mail message is being sent "in compliance with proposed federal legislation for commercial e-mail" and that "further transmissions may be stopped at no cost by submitting a request to be removed."

Challenges To State Laws Regulating E-Mail Ads

In key aspects, the FTC’s emphasis on combating deceptive e-mail advertising and the "opt-out" emphasis of the bill passed by the House in 2000 are similar to laws regulating e-mail advertising already adopted by approximately 20 states. No state has banned spam entirely. Instead, some make it illegal to send messages with phony or misleading subject lines or transmission paths. Others require that e-mail messages afford recipients an easy opportunity to decline further solicitations. In addition, a few states have enacted criminal prohibitions against deceptive e-mail advertising.

So far, lawsuits brought pursuant to state statutes have tended to be individual actions brought in small claims court or its equivalent. Indeed, these state claims appear to be gaining in popularity, thanks in no small part to the exchange of information on the Internet (and by e-mail of course) to assist would-be plaintiffs. There are a variety of groups, each with a visible Internet presence, that are passionately devoted to eliminating unsolicited commercial e-mail in all of its forms.

The Washington State Test Case

There have been several significant state court decisions considering the constitutionality of the states’ attempt to regulate unsolicited e-mail. The leading case, State v. Heckel, concerns Washington state’s unsolicited commercial e-mail law. Washington, home to Microsoft and other leaders of the Internet economy, was among the first states to regulate such e-mail. Its law is typical of state regulatory efforts, prohibiting all unsolicited commercial e-mail sent by or to Washington residents with misleading subject lines, false transmission paths or phony return addresses.

In October 1998, the Washington attorney general brought a civil suit under the statute against bulk e-mailer Jason Heckel. Heckel, an Oregon resident, marketed his own pamphlet, "How to Profit From the Internet," by allegedly sending up to one million unsolicited commercial e-mails. The state alleged that Heckel had violated the statutory prohibition against sending commercial e-mail with false or misleading information in the subject line and by misrepresenting the source of his entreaties by filtering them, without permission, through more than a dozen different domain names registered to others.

Initially, a state trial court threw out the suit against Heckel prior to trial, ruling that the Washington law was an unconstitutional burden on interstate commerce. The trial court’s ruling immediately called into doubt the viability of not only Washington’s law, but also all similar attempts by states to regulate unsolicited e-mail. The trial court concluded that a crazy quilt of inconsistent state laws regulating unsolicited commercial e-mail places an undue burden on Internet entrepreneurs who market their products across state and even international boundaries.

The trial court’s decision, however, was unanimously reversed by the state supreme court. The appellate court concluded that Washing-ton’s law was largely consistent with other states’ laws and that Washington’s mandate that e-mail carry accurate subject lines and transmission pathway information was unlikely ever to conflict with that of other states. "[I]t is inconceivable that any state would ever pass a law requiring spammers to use misleading subject lines or transmission paths."

Subsequently, Heckel appealed the state supreme court’s ruling to the U.S. Supreme Court, which declined to intervene, at least for the present. The suit against Heckel now returns to the trial court where the state will have to prove its allegations.

California Sides With Washington

Similarly, in January a mid-level California appeals court upheld that state’s prohibition against unsolicited commercial e-mail in Ferguson v. Friendfinders, Inc. Generally, California requires that advertisers provide ways for e-mail recipients to get off their e-mail lists, as well as clearly stating in the subject line that the message is an advertisement. In addition, the law requires that senders of unsolicited commercial e-mail begin the subject line of the message with the characters ADV, or ADV:ADLT if the material is of a sexual nature. The California appeals court, relying heavily on the Washington Supreme Court’s decision in Heckel, also rejected a federal constitutional challenge to the law. The appeals court observed that the "financial harms caused by the proliferation of [unsolicited commercial e-mail] have been exacerbated by the use of deceptive tactics which are used to disguise the identity of the [e-mail] sender and the nature of his or her message. Such deceptive tactics increase the already significant costs that [such e-mail] imposes on Internet users."

The appeals court decision is the first higher-court ruling on the constitutionality of California’s law. The defendants in the case, two Silicon Valley companies, are not expected to appeal the decision to the California Supreme Court, but instead plan to proceed to trial on the allegations that they violated California’s anti-spam law.

Internet Service Providers File Suit, Too

In addition to lawsuits based upon state statutes regulating unsolicited commercial e-mail, several Internet service providers — most notably America Online — have brought lawsuits based upon such common law causes of action as trespass and breach of contract against e-mail marketers who have violated the service providers’ policies regarding unsolicited e-mail by sending millions of unwanted messages. So far, the Internet service providers have been successful advancing this legal strategy, as well, winning millions of dollars in judgments and settlements.

Undoubtedly, as more states enact laws regulating unsolicited commercial e-mail, and more lawsuits are brought under them, additional challenges can be expected that will continue to shape the legal landscape.

Tips For Implementing An Electronic Advertising Program

Given the complex and developing array of federal and state laws, newsletter and electronic publishers who intend to advertise via facsimile or e-mail may wish to consider the following tips before hitting the "start" button on their fax machines or clicking the "send" icon on their computers — or hiring someone else to do so:

• Get consent. Except with respect to current subscribers, the most unimpeachable course is to send advertisements only to those from whom you have obtained express authorization in writing or otherwise.

• Track requests to "opt out." Maintain accurate records of all requests by recipients to be removed from your "mailing" list, and remove them promptly. To simplify the tracking of requests for removal, provide, in a prominent location on the advertisement, the telephone number or e-mail address that recipients should contact if they do not wish to receive further solicitations from you. (And have a procedure for dealing with requests that arrive at the company at a different phone number or by regular mail.)

• Monitor advertising service providers. If you hire someone else to transmit your faxes or e-mails for you, give detailed instructions concerning the intended recipients and handling of requests for removal from mailing lists. Monitor the subsequent advertising carefully; any error by the service may be attributed to you.

• Be Careful With List Rentals. If you rent or purchase a list of fax numbers or e-mail addresses, look for contractual guarantees that the persons on the list have consented to receive advertisements and a promise from the list owner to protect you if a recipient sues.

• Consult state laws. Determine whether the state(s) from which you send fax and e-mail advertisements have regulations governing such activity and heed them carefully. In addition, consider the location of recipients to whom you typically send advertisements, and whether geographic concentration warrants focusing on the laws of states into which you are regularly sending advertisements.

• International laws. Even though complying with state and federal law may seem to be more than enough work, remember that, when your advertisement crosses the border into Canada, Europe or elsewhere, there are likely to be additional legal regulations pertaining to your advertisement. Do not assume that any foreign laws apply only to businesses actually based in foreign countries.

• Other issues. Of course, in addition to the laws prohibiting unsolicited fax and e-mail advertisements addressed in this article, other laws, too, must be considered when implementing an electronic marketing program, including laws governing copyrights, trademarks and deceptive trade practices. The Federal Trade Commission’s Web site, www.ftc.gov, is a good starting place for information.

• If you are a member of NEPA, you can take advantage of NEPA’s legal counseling program, through which attorneys at Levine Sullivan & Koch provide general legal advice on the dissemination of marketing and promotional material. Information is available from NEPA or from attorney Tom Curley at Levine Sullivan & Koch at (202)508-1138 or tcurley@lsklaw.com.


This Memorandum is reproduced with permission.
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