Locke Lord QuickStudy: Fourth Circuit Rejects Vicarious Liability Theory Under the TCPA

March 22, 2018

The Fourth Circuit dealt another blow to plaintiffs trying to drum up vicarious liability under the Telephone Consumer Protection Act (“TCPA”). See Hogdin v. UTC Fire & Sec. Americas Corp. Inc., 2018 WL 1308605 (4th Cir. Mar. 14, 2018). The Fourth Circuit upheld the dismissal of claims seeking to hold home-security alarm manufacturers liable for calls made by home-security system retailers that allegedly violated the TCPA, ruling that the plaintiffs had failed to provide “more than a scintilla of evidence” that the manufacturers authorized or ratified the retailers’ conducted.

In an opinion that reads like a “how to guide” for avoiding vicarious liability, the Fourth Circuit detailed factors courts should consider when determining whether a party is vicariously liable for ratifying another’s actions.

On December 19, 2013, a Multidistrict Litigation Panel consolidated seven class action lawsuits alleging home-security retailers violated the TCPA by making illegal telemarketing calls, and transferred the consolidated case to the Northern District of West Virginia. Id. at 9. The plaintiff’s alleged the retailers placed prerecorded messages and called numbers on a national Do-Not-Call Registry; and that two home-security alarm manufacturers were vicariously liable for these violations. Id. The district court granted summary judgment in favor of the manufacturers, and the plaintiffs appealed arguing that the manufacturers should be vicariously liable of the retailers conduct. Id. at 12.

The Fourth Circuit’s Decision
According to the FCC, vicarious liability under the TCPA is governed by the federal common law of agency, which provides for formal agency as well as “principles of apparent authority and ratification.” Id. at 16. The only agency principal at issue in Hogdin was ratification. Id. A party may “ratify an act by failing to object to it or to repudiate it, or by receiving or retaining the benefits it generates.” Id. (internal citations and quotation marks omitted) (citing Restatement (Third) of Agency 4.01(1) (2006)).

The plaintiffs contended the manufacturers were vicariously liable for the retailers’ telemarketing calls because they ratified the retailers practices after learning they were using prerecorded messages and calling numbers on the Do-Not-Call Registry to promote home-security equipment. Id. at 17. The plaintiffs argued the manufacturers (1) ratified the retailers’ conduct by failing to repudiate their actions, (2) rewarded the retailers for their illegal practices, and (3) accepted benefits that stemmed from the retailers’ violations. Id.

The Fourth Circuit disagreed with all three propositions, and upheld the district court’s grant of summary judgment in the manufacturers’ favor. In doing so, the court referred to key contractual provisions and affirmative steps taken by the manufacturers that were sufficient to cut off vicarious liability. This analysis essentially serves as a road map for avoiding vicarious liability under the TCPA that can be followed by any businesses that utilize third party retailers or salesmen to sell their products.

The court first detailed the manufacturers’ actions showing they had repudiated the retailers’ conduct. Id. at 18. After receiving complaints about the retailers’ telemarketing calls, both manufacturers investigated the complaints and reminded the retailers that they were prohibited from representing themselves as agents or employees. Id. at 18. Further, one manufacturer made the president of the retailer attend an ethics seminar, while the other manufacturer reasonably relied on assurances from its retailer that the retailer “was not involved in any wrongdoing and that it would comply with all applicable laws in the future.” Id. at 18. Eventually, the retailers terminated their agreements with the retailers based in part on their telemarketing practices. Id. at 18-19.

As to arguments regarding the manufacturers rewarding the retailers for—and accepting benefits from—the TCPA violations, the Court found these arguments as speculative and based on conjecture. The Court reasoned that the plaintiffs failed to cite any evidence showing either manufacturer knew the telemarketers’ sales numbers were fueled by robocalls and calls to the Do-Not-Call Registry. Id. at 19-20. With regard to claims that the manufacturers benefitted from the TCPA violations, the plaintiffs “failed to proffer any evidence supporting their allegation that illegal telemarketing practices increased [the manufacturers’] sales of home-security products.” Id. at 20.

Going Forward
To avoid significant TCPA liability on an individual or class-wide basis, entities whose practice involves outside vendors making telephone calls should strongly consider adopting the following policies:
  • Create a system for responding to consumers about their complaints.
  • Create a system for investigating consumer complaints about vendor practices.
  • Investigate consumer complaints, including inquiring about the vendor’s TCPA compliance program.
  • Take appropriate remedial action for vendors that may not be fully compliant with the TCPA.
  • Require and document training reminding vendors that they are obligated to comply with all applicable telemarketing laws. 
  • Be willing to terminate a vendor if complaints continue.