Only a few days ago, my colleague Elizabeth Patton posted about the Federal Trade Commission’s release of its annual Data Book outlining the most recent statistical data about uses of the National Do Not Call Registry, a national database maintained by the FTC listing the telephone numbers of individuals and families who have requested that telemarketers not contact them.

Today, the FTC followed that up by issuing its biennial report to Congress on the Registry. The FTC reports that many businesses and organizations have attempted to exploit exceptions to the Telemarketing Sales Rule (TSR), and that these organizations have occasionally faced stiff civil penalties as a result. As such, companies engaged in telemarketing tactics should take the time to understand the TSR and its exceptions and make sure their practices are in compliance.

Among other things, the TSR makes it illegal for a business or individual taking part in “telemarketing” — defined as “a plan, program, or campaign . . . to induce the purchase of goods or services or a charitable contribution” involving more than one interstate telephone call — to call any phone number listed in the Registry. There is an exception, however, for calls to consumers with whom the company has an “established business relationship.” This exception allows sellers and their telemarketers to call customers who have recently made purchases or made payments, and to return calls to prospective customers who have made inquiries, even if their telephone numbers are on the Registry.

To fall within the “established business relationship” exception, the call must be to a person with whom the seller has an existing relationship based on: (1) the consumer’s purchase, rental, or lease of the seller’s goods or services or a financial transaction between the consumer and seller, within the eighteen months immediately preceding the date of a telemarketing call; or (2) the consumer’s inquiry or application regarding a product or service offered by the seller, within the three months immediately preceding the date of a telemarketing call.

According to the FTC, businesses routinely abuse this exception by engaging in calls in which the seller identified in the telemarketing call and the seller with whom the consumer has a relationship are technically part of the same legal entity, but are perceived by consumers to be different because they use different names or market different products.

Whether calls by or on behalf of sellers who are affiliates or subsidiaries of an entity with which a consumer has an established business relationship fall within the exception depends on consumer expectations. In other words, the question is whether the consumer likely be surprised by the call and find it inconsistent with having placed their phone number on the Registry. The greater the similarity between the seller and the subsidiary or affiliate in the eyes of the consumer, the more likely it is that the call will fall within the established business relationship exception.

Another issue arises when businesses place telemarketing calls to consumers after acquiring the consumers’ telephone numbers from others — so-called “lead generators” — without screening the numbers to remove those listed on the Registry. Such calls generally do not fall within the established business relationship exception because, while consumers may have a relationship with the lead generator, they do not have an established business relationship with the seller who has purchased the leads. Thus, a single sales pitch can produce multiple illegal calls, generating one or more calls from both the lead generators and the telemarketer.

The report also clarifies that the submission of a sweepstakes entry form does not create an “established business relationship” between the consumer and the company administering the sweepstakes, and notes several enforcement actions that have been brought against companies for making illegal calls that relied upon sweepstake entry forms as a basis for making telemarketing calls.

Recent actions by the FTC indicate that businesses and other organizations that use or rely on telemarketing tactics would be well-advised to review their telemarketing practices and ensure they are in compliance with the TSR and related federal regulations.

When done correctly, sweepstakes and prize contests can be an effective tool for building brand awareness and gaining customers.  However, businesses that fail to abide by applicable statutes and regulations when using these promotional devices can suffer disastrous consequences, including civil enforcement actions, government inquiries, or even criminal penalties.

For instance, earlier this month, the Federal Trade Commission (FTC) announced it had sent more than $532,000 in restitution payments to victims of a vacation prize scheme.  The scheme, conducted primarily by VGC Corp. of America between 2008 and 2011, involved a promotion offering expensive vacation packages to callers who correctly answered a simple trivia question.  All callers (regardless of whether they answered correctly) were told they had won the vacation package but had to pay an “administrative fee” before they could collect.  Callers were later informed of several limitations and restrictions to the offer, but only after they had already paid between $200 and $400 in fees.

This case serves as a reminder of the need for businesses that implement these kinds of marketing tactics to have at least a basic understanding of the statutory and regulatory framework.  A number of federal laws require that certain disclosures be “clear and conspicuous” in contest promotions, including but not limited to all rules and conditions of the promotion and the odds of winning any given prize.

Additional regulations may apply depending on the particular type of contest or giveaway at issue.  Promotions in which prizes are awarded to members of the public on the basis of skill or knowledge (“skill contests”), or where the gift or prize is available to all recipients who respond according to the companies’ instructions (“premium offers”), can typically require payment in order to participate.  However, promotions that award prizes to consumers by pure chance (“sweepstakes”) cannot require payment of any kind, as whenever a sweepstakes-style contest requires a payment, it risks crossing the line into an illegal lottery.

Any businesses considering implementing these kinds of promotional devices should take the time to understand these distinctions and abide by all disclosure requirements.  If the past is any indication, the FTC and other federal agencies will continue their strict enforcement of these rules.