Federal Trade Commission v. Credit Bureau Center, LLC, 2017 WL 680344, No. 17 C 194 (N.D. Ill. Feb. 21, 2017)
I think Eric Goldman will see a §230 issue here. The FTC sued CBC, Michael Brown, Danny Pierce, and Andrew Lloyd seeking a permanent injunction and equitable relief for violations of section 5(a) of the FTC Act, the Fair Credit Reporting Act (FCRA) and associated rules, and the Restore Online Shoppers’ Confidence Act (ROSCA), which regulates negative option offers.
CBC does business as eFreeScore.com, Creditupdates.com, and FreeCreditNation.com. It has one member/owner who is also the sole employee, Brown; it uses independent contractors for sales, marketing, customer service, and accounting. CBC offers online credit scores and credit monitoring services to consumers. Brown claimed that there were two primary lines of business: (1) offering credit monitoring solutions directly, and (2) offering credit monitoring solutions through an affiliate marketing program to consumers. This case concerns (2). CBC hired affiliates or affiliate networks to attract consumers and drive traffic to its websites in return for commissions.
CBC hired Revable Network LLC, which was owned and run by Pierce, to perform affiliate marketing. Pierce hired Lloyd, who established and ran a fraudulent advertising campaign: he posted Craigslist ads purporting to offer attractive rental properties:
When a consumer responded to one of these ads, Lloyd replied by impersonating the owner or manager of the purported rental property—which did not actually exist—and inviting the consumer to take a tour of the property. Visiting the property, however, was conditioned on the consumer first obtaining his or her credit report. The phony landlord letter included a link that Lloyd identified as a credit report service. When the consumer clicked on the link, she would arrive at a landing page that showed an offer from CBC for a free credit report and credit score. When the consumer signed up, she received a free credit score but was also enrolled in CBC’s credit monitoring service, which carried an automatic monthly charge of twenty to thirty dollars.
From December 2014 to January 2017, Pierce and Lloyd generated over 146,000 sales for CBC, representing at least $6.8 million for CBC, which paid Pierce approximately $2.3 million, of which Lloyd received $1.9 million.
CBC and Brown conceded that Pierce and Lloyd defrauded customers but denied any involvement or knowledge of the fraud. The court found that the FTC was likely to succeed in showing that Pierce and Lloyd CBC’s agents. To bind a principal, the “agent must have either actual authority, apparent authority, or the principal must ratify [the agent’s] actions.” “[R]atification requires that the principal have full knowledge of the facts and the choice to either accept or reject the benefit of the transaction.” Ratification can be shown through circumstantial evidence, “including long-term acquiescence, after notice, to the benefits of an allegedly unauthorized transaction.”
Pierce and his affiliate network had express authority to use ads to direct traffic to CBC’s websites, and Pierce was permitted to delegate that work to others. “Pierce was fully aware of Lloyd’s fraudulent advertisements from the inception of Lloyd’s Craigslist campaign. Pierce was directly involved in aspects of Lloyd’s mailing campaign, such as giving Lloyd his approval to continue mailing advertisements.” And there was evidence that CBC and Brown were involved in the Lloyd/Pierce marketing campaign, including instructions from Brown to increase or decrease the level of traffic to its website depending on CBC’s needs. Perhaps enough to overcome Eric Goldman’s objections:
Another text message indicates that Brown, on behalf of CBC, directed Pierce to change the content of the landlord letter that directed consumers to its website. Specifically, Brown advised Pierce to change the wording of the offer made in the landlord letter in order to reduce complaints of phishing against CBC, saying, “Please change your template to say something [like] don’t email me the report just print it out.”
This was enough to show express or implied actual authority, and there was also a likelihood of success on the ratification pathway to agency, which I predict Eric Goldman will not like at all. Of the over 10,000 recorded calls in the 60-day period preceding the filing of the lawsuit, at least 87 calls were marked in CBC’s call logs under the disposition, “Cancellation—[Craigslist] Post.” Brown also testified that in 2015 he read a complaint about a fraudulent advertisement that traced back to Craigslist, “asked for more information on the matter, did not receive the information, but simply stopped investigating. He also admitted that in July 2016, the BBB informed him that CBC had a pattern of complaints regarding fraudulent Craigslist advertisements. CBC had the ability to trace any particular BBB complaint to the responsible affiliate, but didn’t do that or take any other remedial action. Brown tried to claim that CBC’s customer service center was never directed to advise Brown about complaints in specific or in general. At the hearing, Brown “seemed to change course, saying that some types of complaints were to be ‘escalated’ to him, but he was vague on what these were.” The court found a reasonable likelihood that the FTC would show that “CBC hid its head in the sand and deliberately avoided knowledge of complaints so that it could keep raking in the benefits of Lloyd’s and Pierce’s activities.”
Brown was also individually liable given his direct participation/control and actual/constructive knowledge, which can be shown by “reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth.” Brown had the ability to control Pierce and Lloyd’s marketing activities; CBC’s tracking system monitored sales and refunds per affiliate and it had the power to deactivate an affiliate at any point in time. Although Pierce and Lloyd had their own custom landing page, CBC had authority to modify it; Brown also had the ability to control the volume of traffic generated by Pierce and Lloyd to CBC’s websites and the content of Lloyd’s ads.
“Brown either read BBB complaints regarding the fake advertisements or deliberately or at least recklessly ignored them.” When he received three complaints from the BBB, Brown wrote back, “It’s our policy that once we identify a pattern of potential abuse we disable the offending party which we have done.” But he testified that he looked at only two of the complaints, and he made no effort to search CBC’s internal tracking system to find out which affiliate(s) were responsible. Brown’s establishment of and dealings with CBC’s customer service center “seemed geared toward preventing knowledge of fraud-based complaints from filtering up to him.” And his texts suggested “some level of knowledge on Brown’s part” of the deceptive conduct.
FCRA: the websites failed to prominently disclose that free credit reports are available under Federal law at: AnnualCreditReport.com, as required by law. Brown and CBC were directly responsible for the content of the website.
ROSCA: ROSCA outlaws negative options without clear and conspicuous disclosure of all material terms before obtaining a consumer’s billing information and without express informed consent before the consumer’s card/account is charged. The CBC landing pages made bold, large-type offers: “Get Your Free Credit Score and Report as of [Date].” The consumer was required to provide her credit card information for a $1.00 refundable charge. Just below the credit card entry, in smaller, fainter print, the websites state: “When you place your order here you will begin your membership in eFreeScore.com. You will be billed $1.00 today and start your trial membership. After your 7-day trial period you will be charged $29.94 every month.” The FTC was reasonably likely to show that this disclosure didn’t disclose all material terms and obtain informed consent; CBC’s offer didn’t actually describe the membership.
CBC alleged that no injunction should issue because of harm to its allegedly untainted line of business offering credit monitoring services directly. But there was a serious concern about the receiver’s ability to obtain restitution—it had gotten approximately $2.1 million from CBC, but consumer damages might be as high as $6.8 million. Also, following entry of the TRO, Brown transferred over $40,000 to a newly formed company, Credit Data Center LLC, as well as $150,000 to his attorney (held in the attorney’s trust account). Although CBC argued that many of its customers actually wanted the credit monitoring service that they signed up for, it didn’t provide the receiver with usable information that would allow anyone to determine whether this was true. And the receiver couldn’t distinguish the allegedly separate line of business “due to the state of CBC and Brown’s accounting records,” so there was no way to figure out what was untainted. The public interest, including preserving funds for consumer redress, outweighed the private interests cited at stake, unless defendants offered a workable method to separate and preserve a legitimate line of business.