While plaintiffs’ attorneys seek to streamline the filing of class actions under the Telephone Consumer Protection Act (“TCPA”), a recent court decision serves as a reminder that there are clear limits to a plaintiffs’ ability to recover statutory damages under a theory of vicarious liability. On May 18, 2015, the U.S. District Court for the Central District of California awarded summary judgment to defendant UTC Fire & Security Americas Corporation, Inc. (“UTC”), finding the security equipment manufacturer could not be held vicariously liable for the actions of its authorized dealers under any theory of agency. The decision marks a win for companies that operate using a dealer or retailer network to distribute their products, in a legal area that is a noted favorite of class action lawyers, and provides an example for how companies may avoid vicarious liability under the TCPA by carefully structuring the way in which they authorize resellers to use and advertise their product.

In Makaron v. GE Security Manufacturing, No. 14-CV-1274 (C.D. Cal. May 18, 2015), the plaintiffs brought a class action against UTC, a manufacturer of residential and commercial security equipment, and Security One Alarm Systems (“SOAS”), a reseller of UTC’s products. The lawsuit alleged that UTC was vicariously liable for unlawful autodialed and prerecorded voice calls placed to the plaintiffs by SOAS in violation of the TCPA. The court closely examined the relationship between UTC and SOAS to determine whether there was a principal-agent relationship between the manufacturer and reseller. UTC sold its equipment through independent distributors and “authorized dealers,” who, then, resold to other businesses and consumers.  It only marketed its products to other businesses.  SOAS, acting as a home security dealer and retailer, carried and sold UTC equipment and equipment from other brands.  SOAS entered into a “dealer agreement” to become an “authorized GE Security Dealer.” UTC owned its own brand – Interlogix – and a license from GE Trademark Leasing, under which it could grant limited licensing rights to resellers for the purposes of selling GE-branded security equipment. Under this program, authorized dealers, such as SOAS, received a limited license from UTC to use certain GE logos and trademarks but were subject to certain contractual limitations, including the following:

  1. Complying with all applicable telemarketing laws;
  2. SOAS was “not permitted to market as or ‘on behalf of GE or Interlogix'”;
  3. SOAS acknowledges and agreed “that it is not a spokesperson for GE Security and that Dealer shall not take any actions, or fail to take any reasonable actions, that indicate to any third parties that Dealer is authorized to speak on behalf of GE Security”; and
  4. The authorized dealers were described as independent contractors and the agreement stated they “shall have no right or authority to assume or create any obligation or responsibility, express or implied, on behalf of, on account of, or in the name of GE Security, or to legally bind GE Security in any manner whatsoever.”

While the supposedly unlawful phone calls were made by SOAS to advertise UTC’s products specifically, the court found that UTC had neither actual nor apparent authority over the marketing of its security equipment after the equipment had been sold to distributors.  The opinion first emphasized that UTC did not have actual authority over the sales tactics of its third-party distributors and dealers, as its licensing agreements did not permit them to market “on behalf of” GE.  Further, UTC’s involvement in the marketing process ended with the sale to distributors. UTC was not liable under apparent authority because it did not directly communicate with the end-consumers who actually put the products to use. The court found it unreasonable to conclude that the manufacturer had “manifested” to consumers that SOAS was making calls on UTC’s behalf. Any potential “manifestations” were made to SOAS and other authorized dealers as UTC did not communicate directly to consumers.

Makaron represents the most recent case in a line of decisions and guidance analyzing federal common law principles of agency.  In 2013, the Federal Communication Commission (“FCC”) issued a declaratory ruling, finding that a seller only may be held liable for violations committed by third parties that are agents of the seller under federal common law principles.  As we wrote last year, in Thomas v. Taco Bell Corp., the Ninth Circuit similarly found that in addition to traditional agency principles, the federal common law principles of ratification and apparent liability could trigger vicarious liability. In Thomas, a text message was sent by a vendor engaged by an advertising firm, which in turn had been hired by the Taco Bell franchisors within the Chicago area. The Ninth Circuit affirmed the lower court’s decision that neither the local franchises, the advertising firm, nor the vendor was an agent of Taco Bell, and as a result, like UTC in Makaron, Taco Bell could not be held liable for the marketing actions of any of the aforementioned entities.

The FCC historically has levied hefty penalties for TCPA violations and we consistently have waved warning flags about class actions. However, Makaron shows that manufacturers can help steer clear of TCPA liability by carefully controlling the manner in which they authorize resellers and licensees to use their products.

* Jennifer S. Talbert is a Venable summer associate and not admitted to practice law.