Charges of deception are upheld against Seattle entrepreneur
The FTC accused Ian Eisenberg, 34, of Seattle, and his business partner Chris Hebard, 49, of Newport Beach, Calif., of duping consumers and small businesses out of more than $24 million. While he sided with the agency on the liability question, U.S. District Judge Robert Lasnik denied the damage amount, referring the issue to a magistrate judge to oversee mediation.
In his ruling last month, Lasnik agreed with the FTC that companies controlled by Eisenberg and Hebard violated federal law by using a slick marketing scheme to fool consumers into signing up for Internet service.
In most cases, the defendants knew that "very few of their 'customers' ever used the service for which they had contracted," Lasnik said.
Derrick Newman, a lawyer for Eisenberg and two associated companies, Cyberspace.com and Olympic Telecommunications Inc., said his clients "respectfully disagree with the court's opinion and they're weighing their options."
Lawyers for Hebard did not return a phone call seeking comment.
According to the FTC, the scam worked like this: Between January 1999 and September 2000, the defendants mailed $3.50 "rebate" checks to millions of small businesses and consumers. The check came with an attached form that looked like an invoice and used terms such as "reference number" and "discount taken," making it look as though there was a previous business relationship.
The materials failed to show clearly that by cashing the checks recipients were agreeing to allow the defendants to become their Internet service provider. After the checks were cashed, the defendants started placing monthly charges of $19.95 to $29.95 on the consumers' telephone bills. In addition, the defendants then made it very difficult to cancel future monthly charges and receive refunds.
Lasnik found that the defendants succeeded in creating the "overall impression that the ($3.50 rebate) check resolves some small, outstanding debt. Cashing such a check without further investigation, while not advisable in today's cutthroat and rather underhanded advertising world, is reasonable in the circumstances presented here," Lasnik wrote.
"Having created a false impression in the minds of the recipients and having lulled the consumers into believing that the check is nothing more than a check, the (defendants) cannot escape liability by including fine print disclosures (especially when hidden on the back of the check/invoice and/or filling the envelope with advertisements," Lasnik said.
What is going to happen next, according to FTC attorney Collot Guerard, is that late next month the case will go to mediation before Seattle federal magistrate judge Rick Martinez to identify the quarter million or so consumers and small businesses that were billed and are entitled to some refund. "Then we hope to be in contact with them," she said.
Guerard said that less than 1 percent of the people who cashed the checks "actually read and understood what was going on." Many of the rest are still unaware that they were ever billed, some for a year or more, she said.
Among them was a Seattle company named Cut Flowers that cashed the $3.50 check in February 1999. Until contacted by a reporter yesterday, the company's bookkeeper said she did not know that phone bills in consecutive months in 1999 included charges of $29.95 from Olympic Telecommunications, Inc.
According to records maintained by the defendant companies that were examined by the FTC, there were about 160 small businesses and consumers in Washington state that were collectively billed about $6,400, according to Guerard. Both Cyberspace.com and Olympic Telecommunications are now defunct, according to Eisenberg's lawyer.
Peter Lewis can be reached at 206-464-2217 or plewis@seattletimes.com.