Verizon Wireless Files RICO Suit against Mobile Marketers, Alleges Deception and Fraud in Evasion of MMA Guidelines Requirements for Short Code Campaigns

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Cellco Partnership, doing business as Verizon Wireless, filed a lengthy complaint on March 7, 2011, against mobile marketing entities that have conducted short code marketing campaigns on its network. The complaint alleges that these entities failed to comply with the Mobile Marketing Association’s Consumer Best Practices Guidelines for Cross Carrier Mobile Content Services, which Verizon incorporates into its standard contract provisions.

As described below, this complaint alleges a web of fraud and deceit.  But, in addition to the implications of those allegations, this case is important because it underscores the importance of the MMA Guidelines.  Many organizations are seeking to develop SMS strategies, and this case points out that careful attention to those guidelines, as complex as they may appear to be, is essential to a successful, compliant campaign.

The complaint alleges not just a failure to comply with the MMA Guidelines, but that the marketing entities systematically evaded compliance and that their actions were therefore fraudulent and deceptive. The claims include two counts under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), as well as state law tortious interference and unjust enrichment claims.

Verizon isn’t alone in alleging that the campaigns are fraudulent and deceptive. The Texas Attorney General has filed a complaint under that State’s consumer law against Cylon and most of the same defendants in the Verizon action, alleging that they engaged in “cell phone cramming” through misleading and deceptive acts and practices, resulting in millions of dollars of unauthorized charges on consumers' phone bills.

The complaint alleges that Cylon, a mobile marketer that had contracted to conduct short code campaigns over the Verizon Network in 2009, ran afoul of Verizon’s contract compliance procedures and had its access terminated for failure to comply with the required double opt-in procedure mandated by the MMA Guidelines. The Guidelines place very specific and detailed requirements on marketers to disclose the cost of premium text messaging services to customers prior to enrollment, down to the type size of disclosures, the placement of price information on the opt-in Web page, and the transmission of a confirming text message to the customer. The marketers must disclose to the wireless carrier (in this case, Verizon) the URL of the opt-in Web page, so that the Web site can be checked for compliance with disclosure requirements.

In order to avoid a similar termination in the future for non-compliance, it is alleged that Cylon created a series of entities that it controlled through employees. These entities entered into separate agreements with Verizon, which both masked their connection to Cylon and buffered against the termination of all of its campaigns if any one of them was found to be non-compliant.

But the scheme went further than the creation of these multiple entities, according to the complaint. Cylon sought to evade Verizon compliance audits by creating two opt-in Web pages for each campaign by its controlled entities. Only the URL of the compliant Web page was provided to Verizon for compliance purposes. Customers were presented with a second, non-compliant Web page that obscured pricing information. Taking the evasion up a notch, the complaint alleges that Cylon filtered IP addresses directed to the non-compliant pages, and re-directed requests coming from known Verizon auditors to the compliant pages. Cylon also filtered for multiple requests coming from the same IP address, and re-directed second requests from the same IP address to the compliant Web page, so that a customer who signed up for service via a non-compliant Web page could not later reproduce the sign-up procedure by accessing the non-compliant site a second time.

In an ex parte temporary restraining order issued on March 10, the court granted Verizon’s request that the defendants be required to preserve evidence relating to the scheme alleged in the complaint. Although on March 11, the court denied Verizon’s request for a more extensive temporary restraining order barring the defendants from continuing some of the misleading conduct alleged in the complaint, on the ground that the requested order was too general. The court also denied the defendants’ request for a temporary restraining order against Verizon’s actions that are the subject of its counterclaims. The court’s language was favorable to Verizon’s position as alleged in its complaint:

Plaintiff has submitted specific evidence that Defendants are doing business through shell corporations, using false business addresses, using websites that do not comply with industry standards and that trick consumers, and using diversionary software to prevent Plaintiff from discovering these activities. Doc. 8. Defendants have submitted a declaration in support of their TRO that generally denies these allegations, but that fails to present any specific evidence to support the denials or to refute the allegations of wrongdoing contained in Plaintiff's evidence. Doc. 32. Because Defendants have failed to counter the very specific evidence of wrongdoing submitted by Plaintiff, the Court cannot conclude that Defendants have shown that they have a fair chance of succeeding on their claim that Plaintiff's conduct is improper, for purposes for the tortious interference claim, or that Plaintiff's statements are false, for purposes of the disparagement, libel, and slander claims. In the absence of a fair chance of success on the merits, the Court cannot conclude that Defendants have established the existence of serious questions warranting issuance of a TRO.

A hearing will be held at a future date to hear arguments on Verizon’s request for a preliminary injunction.