Timeshare Industry Hit By Federal Telemarketing Enforcement
November 13, 2000
Robert M. "Bob" Chasnow- Washington
According to the American Resort Development Association, over three million households worldwide own a timeshare interval. Most resort developers and marketers would agree that a wide variety of telemarketing programs have played a prime role in linking consumers to such timeshare resort projects. But it may surprise some to know that, according to the Federal Trade Commission (FTC), consumers lose more than $40 billion a year to telemarketing fraud, a large part of which is related to the US travel industry. Such statistics make it is easy to appreciate why the FTC, as the primary federal consumer protection agency, has focused considerable attention in recent years on the telemarketing activities of purported travel providers and related timeshare sellers and marketers.
The Federal Trade Commission Act (FTC Act), 15 U.S.C. §§41-58, with its mandate of protecting consumers, broadly prohibits unfair or deceptive acts and practices. In 1994, Congress passed the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act), 15 U.S.C. §§ 6101-6108, giving the FTC additional authority to attack telemarketing fraud. In 1995, the FTC promulgated the Telemarketing Sales Rule, 16 C.F.R. § 310. The Telemarketing Sales Rule defines and prohibits deceptive telemarketing practices, prohibits abusive telemarketing practices, requires material disclosures and the maintenance of a do-not-call list.
Over recent years, using the FTC and Telemarketing Acts, the FTC has demonstrated a firm commitment to protecting consumers from travel-related scams. In fact, since 1997, the FTC has conducted three sweeps of the US travel industry targeting travel-related fraud and deception. In 1997, the first investigation resulted in 36 separate actions. The second sweep resulted in 25 separate actions and the FTC’s most recent sweep completed in August 2000, resulted in 85 separate actions. Summarized below are three complaints arising from the year 2000 sweep against timeshare-related companies, Leisure Time Marketing, Inc./Discovery Rental, Inc., Epic Resorts, LLC, and Med Resorts International, Inc.
Current Complaints
In separate actions both Leisure Time Marketing, Inc./Discovery Rental, Inc. (LTM) and Epic Resorts, LLC (Epic), were charged with violating Section 5(a) of the FTC Act, which prohibits unfair and deceptive acts or practices, and with violating the Telemarketing Sales Rule for failing to disclose material information, restrictions or limitations and misrepresenting material information. Complaints against both entities focus on vacation marketing programs designed to sell timeshare interests.
LTM sent unsolicited facsimile (fax) advertisements to places of employment advertising discount travel packages. The fax contained a heading that stated the fax was “To: All Employees,” giving consumers the idea that the advertisement was from their company, or in some way approved by their employer. The advertised vacation packages generally included accommodations in Florida, a complimentary car rental, and a two-night cruise to the Bahamas for “just $299.” As a bonus, two free airline tickets were offered to Hawaii or Cancun to consumers who decided to purchase the vacation package. Upon payment, consumers received additional information in the mail, which typically included previously undisclosed material terms and conditions including that there was a “no refund” policy, that consumers were expected to attend a timeshare sales presentation near the accommodations, and that they must stay at specific hotels, at specific prices for a specified number of days in order to use the “free” airline tickets.
Similar to LTM, Epic, a timeshare developer and operator utilizing third-party telemarketers, solicited consumers through facsimiles or electronic mail messages addressed to “All employees,” advertising vacations and also by contacting consumers who had filled out registration forms in hopes of winning a free trip. Regardless of the method of contact, consumers eventually ended up speaking with telemarketers who would congratulate the consumer on winning a free vacation. In order to take advantage of the free vacation, a reservation fee as high as $698 was required. Upon paying the fee, consumers received a confirmation package containing terms and conditions. Either when consumers read the terms and conditions or upon attempting to schedule their free vacation, they were informed of additional expenses and other material terms and conditions that they must meet in order to use their vacation package, including that the consumer must attend a timeshare sales presentation, be of a certain age, earn a specified income, and stay at specified accommodations.
Under the FTC Act, both LTM and Epic are charged with misrepresenting the total cost to purchase the vacation package and for failing to disclose in a clear and conspicuous manner material facts including the conditions, restrictions and limitations to use or receive the vacation package. Specifically LTM is charged with misrepresenting that consumers would receive free, roundtrip airline tickets to Hawaii or Cancun, when, in fact, consumers did not receive such free airline tickets, and Epic is charged with making false and misleading representations including that consumers had won or been specially selected to receive a vacation travel package, when they had not “won” or “been selected” and the package was only available to consumers if they paid various fees.
In addition to violating the FTC Act, both LTM and Epic face charges of violating the Telemarketing Sales Rule for failing to disclose, in a clear and conspicuous manner, before consumers pay for the vacation packages, the total cost of the vacation and for failing to disclose all material restrictions including that consumers were required to attend a timeshare sales presentation. Additionally, LTM faces charges of misrepresenting that there were no restrictions, limitations or conditions to purchase or receive the free, roundtrip bonus airline tickets, and for failing to inform consumers that LTM had a policy of not making refunds. Likewise, Epic faces additional charges for failing to disclose that consumers must be a certain age to stay at the places of accommodations and must have a certain income level in order to receive bonus parts of the vacation package. The complaint also alleges that Epic violated the rule by misrepresenting material aspects of a prize promotion including that consumers had been specially selected to receive vacation packages when they had not been specially selected and for calling consumers who had previously stated that they did not want to be called.
Med Resorts International, Inc. (Med Resorts), like Epic and LTM, is charged with violating the FTC Act, but unlike the prior examples, no violations of the Telemarketing Sales Rule were charged and, instead, the Virginia Consumer Protection Act, Virginia Code § 59.1-200 and the Holder in Due Course Rule under Section 18 of the FTC Act, 15 U.S.C. § 57a were allegedly violated.
Med Resorts solicited consumers by telephone enticing them with a free vacation offer if the consumer would attend a sales presentation at their office. The presentation introduces membership in a vacation club and includes representations concerning the high-quality resort properties and the high quality of travel services available to members as well as the ability of members to travel anywhere. Membership packages range from $2,500 to $12,995 for a 10-and 30-week package for use over a period of several years.
The FTC’s complaint alleges that Med Resorts violated the FTC Act by making false and misleading representations including that purchasers of vacation memberships: a) can go anywhere - anytime, when in fact Med Resorts did not have sufficient resort accommodations available to fulfill the requests of its members, and b) can purchase airline tickets at below market price. The complaint also alleges that Med Resorts misrepresented that the price quoted in the sales pitch was the total cost to use or receive the vacation club memberships, when it was not the total cost.
Evident from these three complaints is that there are several common problem areas plaguing the marketing of vacation programs. These common problems include failing to disclose total costs to the consumer, failing to inform the consumer of restrictions or limitations such as age and income restrictions, misrepresentations that the consumer has won a promotion or has been specially selected, and failing to inform a consumer that he or she must attend a timeshare sales presentation. Regardless of whether the three complaints were the result of deliberate violations or simple mistakes, it is significant to note that the practices and selling techniques engaged in by these entities are well-known to the timeshare industry.
Since the FTC’s goal is to protect consumers, it should not be surprising that these complaints illustrate the significance of complete and comprehensive up-front disclosures of all material aspects of the solicitation from a consumer’s perspective. Accordingly, timeshare marketers, sellers or developers hoping to avoid getting caught in the next FTC sweep, should bear in mind that goal when developing their marketing programs and attempt to avoid the common problem areas by providing complete and comprehensive disclosures to consumers.
Do-Not-Call Dilemma
Out of the three complaints, only Epic Resorts was cited by the FTC for violating the FTC’s do-not-call provision. The FTC’s do-not-call provision is a significant piece of consumer protection requiring telemarketers to maintain a list of names and telephone numbers of consumers who have stated they do not want to receive calls from the seller. Although most timeshare industry participants would probably assert that they comply with the FTC’s do-not-call provisions, they may not immediately recognize the inconsistencies between typical telemarketing sales techniques and complying with the FTC do-not-call provisions and certain state regulations.
For instance, Kansas requires a telemarketer to terminate a call upon the consumer giving any negative response, such as a statement that the consumer does not wish to listen to the sales presentation, Kan. Stat. Ann § 50-670. Telemarketers in any industry have encountered situations like this and have found that the sales technique of overcoming objections (rebuttals) often results in a successful sale. But, sophisticated telemarketers with rebuttal training could violate state and federal regulations and not even realize it.
Consider for example a program similar Med Resorts’ in which a timeshare sales telemarketer who calls a consumer in Kansas to offer resort accommodations for a low price if the consumer will agree to attend a timeshare sales presentation. The consumer might state that he is not interested in timeshare and does not want to hear anymore about it. A diligent telemarketer might attempt to determine if there is something in particular that the consumer objects to and try to overcome that objection; perhaps by attempting to persuade the consumer to take advantage of the discounted accommodations even if he is not interested in purchasing timeshare. However, when the consumer first states a negative statement on the offer, must the telemarketer end the telephone call? If the telemarketer chooses to use a rebuttal and the consumer again states he or she is not interested in hearing anymore about the offer or the timeshare sales opportunity, should the telemarketer terminate the call and put the consumer on the company’s do-not-call list, or can this consumer be called again on different offers in the future by the same telemarketer? Is this consumer objecting to be called by this company or is he objecting only to this particular offer? Has the telemarketer violated the Kansas regulation by not terminating the call immediately upon a buyer’s negative response?
It seems likely under these circumstances that the telemarketer did violate the Kansas regulation by not terminating the call upon the consumer’s initial objection; although the telemarketer may have been attempting only to “overcome objections,” it is possible that the telemarketer crossed a thin line. But, whether the telemarketer would violate the FTC’s do-not-call provisions if he contacts this consumer again in the future insofar as FTC prohibits a telemarketer from contacting a consumer who has stated he or she does not want to receive calls made on behalf of the seller, is less clear. It is apparent, however, that an aggressive or simply well-trained telemarketer might violate these regulations simply by virtue of mere diligence to be a good salesperson.
This conflict demonstrates the sheer difficulty timeshare marketers encounter as they strive to sell their product and not over-step the myriad state and federal regulations that affect such sales.
What Matters
The complaints summarized in this article illustrate the FTC’s commitment to monitoring the travel industry. The fact that the FTC has conducted three nationwide sweeps aimed at the travel industry in the last four years is a strong indication that such sweeps will continue. All participants in the travel industry whether, marketers, developers or sellers should recognize this and make every effort to provide and/or disclose material information related to the sale of vacation ownership. Failing to do so could result in formal charges. Furthermore, under any circumstances, the FTC Act prohibits “unfair and deceptive practices,” whether through telemarketing or any other means, including any misrepresentations or inaccurate statements about the nature and/or availability of resort property facilities or services, exchange privileges, vacation club usage rights, or promotional incentives.
Mr. Chasnow is a Partner in the firm and practices exclusively in the field of timeshare and resort community development law. Mr. Chasnow can be reached at 202-828-5004 and at rchasnow@hklaw.com.
Kelly D. Lodde, is a new addition to Holland and Knight and practices with Mr. Chasnow in the field of time-share and resort community development law.