United States: DC Circuit invalidates FCC's opt-out requirement for solicited faxes

Good news for businesses that use fax machines to communicate with customers: A panel of the D.C. Circuit has just struck down the FCC's 2014 order mandating that even faxes requested by the recipient that contain advertising material include a special opt-out notice. The decision issued today in Bais Yaakov of Spring Valley v. FCC, No. 14-1234 (D.C. Cir. Mar. 31, 2017), is available here (pdf).

Background

The case arose out of a loophole that exposed many well-meaning businesses to the risk of class actions under the Junk Fax Prevention Act of 2005. That Act banned advertisements sent via fax unless (1) the recipient had given permission to send the fax or (2) for unsolicited faxes, the sender and the recipient had an established business relationship, the recipient had made its fax number available in certain specified ways, and the fax had special disclosures about how to opt out of receiving future faxes. 47 U.S.C. § 227(b)(1)(C). The required opt-out notice for unsolicited faxes is onerous: The notice must be "clear and conspicuous," "on the first page of the" fax, state that the recipient may opt out from "future unsolicited advertisements," provide the sender's "contact telephone and facsimile machine number," and set forth a "cost-free mechanism" for communicating opt-out requests. Id. §§ 227(b)(1)(C)(iii), (b)(2)(D). Fax senders who violate these requirements can be sued for $500 in statutory damages per violation—and treble that amount of the violation is "willful[]" or "knowing[]." Id. § 227(b)(3).

The problem that arose in Bais Yaakov, however, is that when the FCC promulgated regulations to implement the Act, the FCC required the senders of all faxes containing advertisements—including faxes requested by the recipient—to include the opt-out notice that the Act requires to be included only on unsolicited faxes. Eventually, the plaintiffs' bar discovered this anomaly and started invoking this regulation in class actions against businesses that had faxed advertising material with the express consent of the recipients, simply because those faxes either lacked the opt-out notice or because the opt-out notice deviated in some fashion from the statutory requirements. Given the huge stakes of these class actions—up to $1,500 per fax—businesses were often forced to settle despite the discrepancy between the FCC's regulations and the statute.

In 2010, the target of one such class action filed a petition asking the FCC to clarify that the opt-out requirement in fact applies only to unsolicited faxes, as—based on the text of the Act—Congress intended. In 2014, the FCC denied the petition, holding that solicited faxes still must meet the opt-out requirement. But the FCC waived application of the rule to businesses that sent solicited faxes before April 30, 2015, in light of the understandable confusion created by the FCC's position. The business appealed the FCC's order to the D.C. Circuit.

The D.C. Circuit's decision

Today, the panel—consisting of Judges Kavanaugh, Pillard, and Randolph—vacated and remanded the FCC's order by a 2-1 vote.

The majority decision, written by Judge Kavanaugh, concluded that the FCC's rule exceeded its statutory authority in requiring solicited faxes to contain opt-out notices even though the statute imposes that requirement only on unsolicited faxes. The panel majority noted that the FCC had justified its broader rule by contending that Congress had not expressly prohibited the broader rule. But the majority explained:

That theory has it backwards as a matter of basic separation of powers and administrative law. The FCC may only take action that Congress has authorized. Congress has not authorized the FCC to require opt-out notices on solicited fax advertisements. And that is all we need to know to resolve this case.

Judge Pillard dissented. In her view, the FCC's rule was permitted by the statutory language authorizing the FCC to "prescribe regulations to implement" the law's prohibition on sending of faxes without the recipient's "prior express invitation or permission." And because "Congress said nothing about how 'prior express invitation or permission' might . . . lapse or be withdrawn," the FCC could reasonably determine that the only way for the right to revoke consent to be "meaningful" would be for advertisers to be required "to make clear how that may be done."

Judge Pillard also reached another issue—whether the FCC had properly waived application of the opt-out notice to solicited faxes sent before April 30, 2015. The majority had not reached that issue because it was mooted by the majority's invalidation of the rule. Judge Pillard explained, however, that she would have set aside the FCC's retroactive waiver as an improper "windfall" to businesses.

Future implications

The D.C. Circuit's decision in Bais Yaakov is a welcome development for businesses that have used, or are considering using, faxes to communicate with customers. It confirms that businesses are not liable when they send faxes with the express permission of the recipient, regardless of whether the fax includes the statutory opt-out notice. That should help stop an unfortunate tactic adopted by some plaintiffs—of calling a business to request repeated faxed advertisements, and then turning around and suing the business under the Junk Fax Prevention Act. It also should make it harder for plaintiffs to sweep individualized issues regarding consent under the rug when seeking class certification; some plaintiffs have sought to sidestep that issue by suing only over the failure to include an opt-out notice, regardless of whether the fax was solicited or unsolicited.

FCC Chairman Ajit Pai has issued a statement praising the D.C. Circuit's decision. As he observed, the FCC's now-invalidated ruling had adopted an "approach to interpreting the law [that] reflected 'convoluted gymnastics.'"

Hopefully, the D.C. Circuit's decision in this case portends good news in the ACA International case, which remains pending. (See here for our report on the oral argument in that appeal, which involves the FCC's controversial 2015 declaratory ruling that expanded the definition of an autodialer, imposed strict liability for most calls or text messages to reassigned or wrong numbers, and barred companies from entering into agreements with consumers about how to revoke consent to receive autodialed calls or text messages.)

But the only judge on the panel in both appeals is Judge Pillard—who dissented in Bais Yaakov. Will she side with the FCC again in ACA International? If so, will she be in the dissent? Hopefully, the D.C. Circuit won't keep readers of the blog in suspense much longer. Stay tuned for further developments.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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