Court Upholds Injunction on Online Adult Billing System

NEW YORK — A federal appeals court has affirmed a lower court decision that online adult company Verity International Ltd. engaged in unfair trade practices by charging modem users through their phone bills as if they had made international calls to Madagascar, an island nation off the east coast of Africa.

On Monday, the 2nd U.S. Circuit Court of Appeals upheld the Federal Trade Commission’s injunction preventing the defendants from using the improper billing system.

In the alleged dialer scheme, the FTC sued Verity and Automatic Communications, along with owners Marilyn Shein and Robert Green, claiming their disguised billing method created a loophole for people to access online adult content over phone lines without the subscriber’s permission.

The 2nd Circuit rejected the companies’ claim that it was exempted from FTC enforcement because they were “common carriers.” Verity and Automatic, in its argument, said that it was immune from federal regulation because it simply used the billing services of existing phone companies — AT&T, Sprint and AT&T U.K. — to charge its customers anonymously.

In the decision, the appeals court affirmed the FTC’s injunction preventing Verity and Automatic from using the improper billing system and remanded the case back to U.S. District Court in New York to work out restitution matters. The lower court originally imposed a $17.9 million fine against the companies and its owners, but the court requested that it be recalculated.

The FTC claimed that thousands of consumers were defrauded of nearly $250 a piece for services that they did not know had been accessed through their phone lines. Those charges were represented as international telephone calls to Madagascar.

The FTC’s suit stems from a dramatic influx of complaints against Verity that were received since September 2000 through the FTC’s call center and logged in Consumer Sentinel, a database used by law enforcers around the world. A probe revealed that charges on consumers’ phone lines were being initiated by dialer software downloaded from teaser adult sites.

In its complaint, the FTC charged that the calls were reconnected not to Madagascar, but “short-stopped” in London or some other location. Line subscribers were charged the rates to Madagascar at $3.99 per minute, compared to about 8 cents per minute to London.

Two additional companies allegedly conspired with Verity and Automatic, according to the suit. Those companies are Integretel Inc. of San Jose, Calif., and eBillit, a subsidiary of Integretel.

The case is FTC vs. Verity International Ltd., et al, No. 04-5487.