Fourth Circuit: No Ratification, No Vicarious Liability

by Manatt, Phelps & Phillips, LLP
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The U.S. Court of Appeals, Fourth Circuit affirmed summary judgment in favor of two Telephone Consumer Protection Act (TCPA) defendants the panel found were not vicariously liable for calls made by telemarketers promoting their products.

Janet Hodgin sued UTC Fire & Security Americas Corp. and Honeywell, claiming that telemarketers sent prerecorded messages and called numbers on the National Do Not Call Registry to promote the defendants’ products. The defendants ratified this conduct because they benefited financially from the statutory violations and failed to punish the telemarketers’ misconduct, Hodgin charged.

Both companies manufactured home security systems, which they sold to distributors for resale to retailers. Neither company received direct proceeds from the products’ resale to a retailer or consumers. UTC had a deal with Versatile Marketing Systems (VMS), a retailer that used telemarketers to sell the systems, that permitted VMS to use UTC’s trademarks in limited ways.

In 2011, UTC began receiving complaints about VMS’s telemarketing practices. It followed up with complainants and relayed the grievances to VMS. It also required VMS to attend an ethics presentation and later terminated the contract when it determined VMS’s misconduct was damaging its reputation.

Honeywell received similar complaints that one of its retailers, ISI Alarms, was making aggressive telemarketing calls. In 2012, Honeywell received additional complaints about the use of prerecorded calls and ignoring requests to be placed on the company’s no-call list. Honeywell responded to the complaints by opening an investigation that included visits to ISI headquarters and calls from its legal team. ISI insisted that it was not responsible for any misconduct, but Honeywell ultimately terminated the deal in January 2013.

Hodgin’s complaint was consolidated with six other TCPA class actions. The defendants moved for summary judgment, and a district court judge granted the motion. Hodgin appealed, but the federal appellate panel affirmed.

“Plaintiffs failed to proffer more than a scintilla of evidence to support the conclusion that UTC and Honeywell were vicariously liable for the telemarketers’ alleged TCPA violations,” the court said.

A party may ratify an act by failing to object to or repudiate it, or by receiving or retaining the benefits it generates, the Fourth Circuit recognized. However, a party is not bound by a ratification made without knowledge of material facts involved in the original act when the party was unaware of such lack of knowledge.

That was the case for UTC and Honeywell, the court said. When UTC received complaints about VMS, it followed up with the complainant and required the head of VMS to attend an ethics presentation that emphasized telemarketers were contractually obligated to comply with all applicable telemarketing laws. “Finally, UTC terminated its dealer agreement with VMS at least in part because it determined that VMS’s aggressive telemarketing practices were damaging UTC’s reputation,” the panel wrote.

The record demonstrated similar repudiation by Honeywell. When it learned about ISI’s alleged misconduct, the company opened an investigation and informed ISI that its telemarketing practices had placed their business relationship in jeopardy. Despite ISI’s assurances it was not involved in any wrongdoing, Honeywell “terminated its sales agreement with ISI because, among other things, Honeywell continued to receive complaints about ISI’s telemarketing practices,” the court said.

Hodgin also missed the mark with her argument that the defendants made money from the alleged telemarketing misconduct. Although VMS and ISI were entitled to rebates if they purchased a minimum amount of home security products from the defendants each year, “the connections between the rebates and the purported TCPA violations is so attenuated that Plaintiffs’ claim that UTC and Honeywell intended the rebates to reward such misconduct amounts to mere speculation,” the court wrote.

In addition, the plaintiff missed the element of ratification that a party cannot be bound without knowledge of material facts. “Plaintiffs do not cite any evidence showing that UTC and Honeywell knew that the telemarketers’ high sales numbers were fueled by robocalls and calls to the Do Not Call Registry when they signed the dealer and sales agreements that entitled the telemarketers to the rebates in question,” the Fourth Circuit said.

Not only did neither of the defendants receive any direct proceeds from the telemarketers’ sale of home security products to consumers, the plaintiff “failed to proffer any evidence supporting the allegation that illegal telemarketing practices increased VMS’s and ISI’s sales of home security products,” the court wrote, affirming summary judgment in favor of the defendants.

To read the opinion in Hodgin v. UTC Fire & Security Americas Inc., click here.

Why it matters: The Fourth Circuit decision offers a road map for parties seeking to avoid vicarious liability under the TCPA. Both of the defendants made attempts to have third parties achieve compliance with federal telemarketing laws, followed up on consumer complaints, launched investigations into concerns about improper telemarketing, and ultimately terminated their dealer and sales contracts. Given these efforts, the court found the defendants had not ratified the allegedly illegal activity cited in the plaintiffs’ complaint and could not be liable under the statute.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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