A $48 Million Lawsuit Over a Fax

By Karen Harned

Small businesses must navigate through regulatory requirements every day. This can be extremely frustrating, especially because small-business owners usually lack the resources to hire in-house compliance officers -- leaving them especially vulnerable to civil lawsuits predicated upon alleged violations of obscure federal regulations.

Douglas Walburg is a prime example. He runs a modest Midwestern company, and he is now facing a lawsuit that will almost certainly put him out of business. He has been sued for sending a fax to someone who expressly gave him permission to.

His alleged offense? He failed to include information on the fax about how the recipient could opt out of future faxes.

Of course, he probably didn’t realize that the Federal Communications Commission (FCC) had recently issued a rule requiring an opt-out notice on all commercial faxes, solicited and unsolicited -- even though the statute authorizing the regulation refers specifically to "unsolicited" faxes. Invoking the new rule, which authorizes fax recipients to sue for up to $500 per fax and $1,500 for a knowing violation, Michael Nack, a Missouri attorney, brought a class-action lawsuit against Walburg for up to $48 million.

This story is enough to make you want to pull your hair out if you are already concerned about the state of regulatory affairs in America. Clearly we are dealing with a case of regulation gone wild when a business owner faces bankruptcy over such a simple mistake.

Yet it gets worse. The district court granted summary judgment in Walburg's favor, finding that the regulation did not apply in his case. But the Federal Court of Appeals for the Eighth Circuit decided to reverse the lower court -- in its own words, sending Walburg back to face "a class-action complaint seeking millions of dollars even though there is no allegation that he sent a fax to any recipient without the recipient's prior express consent."

The appeals court held that, because the regulation's text clearly applies to solicited faxes (and because the FCC itself interprets the regulation that way), Walburg had to challenge the regulation directly -- he couldn't win by arguing that the regulation doesn't apply to his particular situation. And under a different federal law, the Hobbs Act, anyone challenging the legitimacy of an FCC regulation must start with the agency itself and then head to an appeals court, rather than starting at a district court.

Basically, the appeals court expects Walburg, instead of making his argument in response to a case that has been brought against him, to seek a stay in that case while he makes his argument to the FCC (and then, if that fails, to an appeals court). To quote Justice Alito in the recently decided case of Sackett v. EPA, it is "unthinkable" that in "a nation that values due process" an American citizen would be denied the right to a right to make his case in court when caught in a regulatory trap.

The National Federation of Independent Business (NFIB) Small Business Legal Center is asking the Supreme Court to hear Walburg’s case. We argue that the case raises a matter of grave concern to the small-business community, and frankly for any American who might be charged with violating an illegally adopted regulation. As a basic matter of fairness, individuals charged with violating federal law should always be allowed a full opportunity for vindication.

After all, if Walburg is right, the FCC never had the authority to issue the regulation under which he has been sued. If he is held liable, this truly will be a miscarriage of justice.

Karen Harned is executive director of the National Federation of Independent Business's Small Business Legal Center.

Sponsored Links
Karen Harned
Author Archive