Fraudsters fight FTC, lose

Federal Trade Commission v. Grant Connect, LLC, 2011 WL 5149187 (D. Nev.)

Defendants committed a variety of frauds on the internet, including “lines of credit” through which people could supposedly buy merchandise; grant opportunities; acai berry supplements, etc. They often included unsubstantiated testimonials and testimonials from individuals who never actually used the services. The disclosures were misleading about the fact that consumers would incur recurring charges on their credit cards, and there were also misleading negative-option “upsells” for additional useless products and services. Telephone and internet chat customer service reps for the grant products told consumers a bunch of misleading things, such as that a consumer could use defendant’s database to find a grant to pay off a home mortgage, and that 85-90% of their customers qualified for such grants. Likewise, the “lines of credit” offers presented themselves as credit card offers, using pictures of traditional credit cards, but the credit line had a $39.95 monthly charge and could only be used at the merchant’s online store, and it came with a bunch of fees and negative-option upsells carrying undisclosed monthly charges.

Unsurprisingly, defendants’ products generated numerous customer complaints, expressed in complaints to the BBB, customer service calls, live chats, letters, emails, and credit card chargebacks. Consumers typically complained about unexpected charges, often the negative-option upsells. They also complained that they couldn’t find any grants and that they didn’t receive the credit card they thought they were going to get. When they tried to cancel, the CSRs required them to call different numbers for each upsell program, even though the calls were all answered from the same call center.

One defendant entity had sales of $4.3 million in nearly a year, but 20% chargebacks/refunds. Of over 52,000 grant memberships sold in that period, 91% canceled by the close or shortly after. Another set of defendants had total sales of $29.1 million from January 2008 to June 2009, with a chargeback and refund rate of 15% of total sales, and up to a 23% chargeback rate by June 2009. They were fined over $380,000 by the credit card networks, indicating high chargeback rates, and of the over 500,000 line of credit customers enrolled, 94% had canceled by August 2009.

The FTC won its motion for summary judgment almost in its entirety. Defendants had no defense to the charge that the grant-related claims were misleadingly advertised, though they maintained (wrongly) that the upsells were properly disclosed. Some defendants argued that the customer affidavits were false, but the court found this unconvincing. Some customers averred they never saw anything about the upsells or other charges; defendants argued that the consumers must have seen the disclosures because they had to click on the button indicating they read the terms and conditions. But those aren’t incompatible: “The fact that they had to click in the box indicating they had read the terms and conditions does not mean they actually read the terms and conditions.” (In a nutshell, why contract law is not the limit of consumer protection law.) Even if the upsells were fully disclosed, the grant program was still deceptively marketed.

Similarly with the misrepresentations regarding whether consumers would receive a general-purpose line of credit like a traditional credit card. The misleading nature of the offers was further shown by the high cancellation rate, the high refund and chargeback rate, the comparatively low number of actual orders from the online store, and the complaints to the Better Business Bureau. Defendants tried to argue that they disclosed all the material terms because beneath the words "$7500 credit line" their offer said "towards thousands of our merchandise items." Plus, they tried the “consumers had to check the ticky box indicating they read the terms” defense again. They also claimed to lack scienter because one defendant’s attorney wrote a letter stating that the offer wasn’t deceptive, and one defendant employed a compliance officer.

The court was unimpressed. The offers were marketed in a multi-step process, and the disclosures came out “a little at a time. The disclosures were often in dense compact text or text which is difficult to see, or the consumer had to scroll down on the screen or navigate to another page to read the disclosures. The initial ad would consist of a banner or email which would advertise an unsecured credit line, and the ad did not mention the offer was not for a traditional line of credit or that the credit line could be used only at the merchant's online store.” Even the landing pages sometimes omitted the disclosure, and showed an image of a traditional credit card while promising a “line of credit.” Consumers couldn’t see the online store before submitting payment information. The disclosures (1) that the line of credit wasn’t a major credit card, (2) the nature and amount of the monthly fee, and (3) that the credit line could only be used at the offer website all appeared on a separate page, and even there they were in what appeared at first glance to be a traditional credit card’s terms and conditions, including a table required of credit cards by federal law indicating the interest rate, annual fee, and late charges.

The FTC was entitled to summary judgment that the net impression was deceptive. Even offers with the language "[line of credit] towards thousands of our merchandise items" were deceptive, because of the deceptive banner ads and landing pages. The truth was written in small type “buried by the larger, sensationalized text regarding the amount of credit, the zero percent interest, and the images of a traditional credit card.” Even though defendants never used the term “credit card,” the net impression was deceptive. Some of the defendants were involved in an earlier deceptive scheme using that term, and the lesson they learned was apparently to depict an image of a credit card and call it a line of credit. “Pictures can make an offer deceptive even if other terms are disclosed in words.”

The chargebacks and other consumer complaints confirmed the deceptiveness. Visa and Mastercard penalized the defendants for high chargeback rates, a fraud indicator, even though defendants tried hard to avoid scrutiny, “including using many different company names, merchant accounts, and descriptors to avoid having all chargebacks tied to one company, and separating out the charges for the small up front activation fee and then charging higher monthly fees.” Separating the charges into multiple transactions helped avoid chargebacks, because customers were more likely to seek refunds only on larger amounts.

The lack of orders from the online store also confirmed the deceptiveness. Customers placed only about 400 orders/month despite defendants’ claim to have over 400,000 members. The defendant corporation spent approximately $252,000 in fulfillment costs in a one-year period with over $12.5 million in membership sales. Moreover, when giving out over 400,000 “lines of credit” in amounts of $5,000 or $7,500, the responsible defendant didn’t have the financial resources to support the extension of so much credit to others, “thus suggesting he knew very few people who signed up actually would purchase anything from the store.”

The existence of some satisfied customers, or at least some who didn’t complain, was irrelevant. Even the so-called satisfied customers who supposedly offered testimonials canceled within one or two billing periods. Defendants argued that the chargebacks were “friendly fraud” by consumers who figured out that they could engage in chargebacks even when they received what they ordered, but they didn’t present any evidence of that, nor was it consistent with the high refund and cancellation rates.

Nor was there any genuine issue of material fact on scienter. As for the attorney opinion letter, it wasn’t clear “what the attorney was shown or was told about the offer for which he was providing his opinion,” so it wasn’t clear that defendants relied on the letter for any specific web page they used. Also, to the extent the attorney approved the line of credit offers, he was wrong. “Given the way the LOCs were marketed, combined with the high cancellation, refund, and chargeback rates, Defendants were at least recklessly indifferent as to the deceptive nature of the offers even if they previously had obtained an attorney opinion letter. Defendants could not continue to rely on the attorney opinion letter in the face of compelling evidence of consumer confusion without being recklessly indifferent to the misleading nature of their ads, or being aware of a high probability of fraud but intentionally avoiding the truth.”

Same with the compliance officer, Rachel McKinnon. “McKinnon testified she had no prior regulatory compliance experience, and there is evidence that some of her suggestions to management to take down misleading web pages were ignored.” Anyway, if she approved the offers, she was wrong, and defendants had other indicators that their claims were deceptive.

The FTC also won summary judgment based on defendants’ failure to disclose that a down payment would be required for most items bought at the “line of credit” store, so the consumer couldn’t buy the item entirely on credit, as well as on their failure to disclose additional monthly fees associated with membership.

Similarly, the FTC won summary judgment on defendants’ misrepresentation of the earnings potential of work-from-home schemes—key language suggested that consumers could make at least $45 per domain name they “flipped,” spending 15 minutes on each domain name, and offered a chart showing how much people could make depending on how much time a day they spent on the scheme. Defendants argued that their statements were just examples or projections of what a person could make, not promises or guarantees. This didn’t work because of the FTC’s substantiation requirement; defendants had no basis for these claims. Defendants argued all that they needed was testimonials, because they wouldn’t have documents establishing the amounts that consumers made. “Even if Defendants were correct as a matter of principle, Defendants have not presented any evidence that a single testimonial is genuine (an actual customer gave the testimonial), much less truthful in its representations (the customer actually made money flipping domain names).”

Similarly, defendants operated an “educational tool to learn how to sell items on eBay and Google.” While claims of "big money waiting" or "make big money through Google and eBay" were non-actionable puffery, "Riches range from a few hundred dollars a month to $50,000 or more a year!" was unsubstantiated, and testimonials from an individual who claimed to make thousands of dollars using the program, and another who claimed to make over $500 a day were also unsubstantiated.

Defendants also misrepresented the health benefits of a product called Acai Total Burn. The court denied summary judgment on the claim that defendants wrongly used Oprah and Rachael Ray testimonials to market the product, because defendants claimed they never used such claims, but the FTC won summary judgment on its claims relating to defendants’ use of false non-celebrity testimonials. “The same testimonials were used no matter which website Defendants were using for a particular offer. For example, Defendants used testimonials for Grant Connect before Grant Connect had its first customer. In another example, one individual gave the same testimonial for two different credit amounts on the LOC offers.” Defendants presented no non-hearsay evidence that the testimonials were geniune. They offered some release forms, but presented no evidence that the releases were genuine and did nothing else to verify them.

The FTC won again on failure to disclose the negative option upsells. The disclosures were not clear and conspicuous. “Although the terms and conditions page typically, though not always, fully disclosed the upsells' terms, a consumer should not have to view the terms and conditions on a separate web page to learn they are being charged for two or three recurring monthly membership charges unrelated to the product they actually ordered and which they did not request.” The small type and poor placement supported a finding of deceptiveness, as did the high number of chargebacks etc. and consumer statements submitted by the FTC averring that they didn’t know they’d been enrolled until they were charged. In one year, one of the upseller entities made over $5 million, but spent only $2000 in fulfillment costs. “[I]t is telling that Vcomm spent approximately three times more money on customer service than it did on the actual product for the customer.”

The FTC also alleged an EFTA violation that consumers’ accounts were debited without proper consent. Defendants argued that, as required, they provided a copy of the authorization to the consumer via an email receipt. But the evidence showed only that they provided an email welcoming consumers to the membership program. The confirmation emails did not set forth the terms of the authorization for recurring charges, such as the amount the consumer would be charged and at what interval, as required by the regulations. Also, given the deceptive upsell marketing, the fact that the consumer was about to be enrolled in several memberships with recurring monthly charges was not adequately disclosed. The FTC provided consumer affidavits showing that consumers did not realize they had been enrolled in the upsell offers until they noticed the charges on their credit card statements. The transfer terms were not clear and readily understandable. Summary judgment for the FTC again.

The court granted the FTC’s request for an injunction banning defendants from (1) engaging in negative option marketing, continuity programs, preauthorized electronic fund transfers, or the use of testimonials, and (2) marketing and selling products related to grants, credit, business opportunities, and diet supplements or nutraceuticals. One individual defendant was a repeat offender involved in a simialr credit card scheme, “conduct for which he currently is incarcerated and for which he was under investigation and faced criminal charges during part of the time he engaged in the conduct at issue in this case.” Contrary to his argument, a lifetime ban on engaging in certain activities didn’t violate the Thirteenth Amendment.

The other individual defendants “technically” weren’t repeat offenders in the same way, since their prior contacts with the FTC involved only, variously, (1) violation of a preliminary injunction by moving money, (2) entering into a stipulated ban on telemarketing without admitting wrongdoing, (3) being involved in other FTC enforcement proceedings, and (4) being aware of the allegations against the other defendants and still choosing to associate with them in an internet marketing scheme resembling those already challenged by the FTC. As for (1) and (2), the court noted that prior contact with the FTC put the defendants on greater notice than other people. “Defendants' readiness to flout the law, the extensive nature of the activity, and the adaptability of Defendants' methods to other products counsel in favor of permanent injunctive relief as to the individual Defendants.”

As the court pointed out, defendants used numerous offers all using the same deceptive strategies, resulting in millions of dollars in injury; they “were willing to flout the law to offer the deceptive grant product which no Defendant attempts to defend as a legitimate product”; they all participated in the deceptively marketed upsells which had dubious value and legitimacy (among other things, one was a legal product offered by nonlawyers); and they all participated in attempting to evade detection by merchant chargeback programs. A broad and permanent ban was appropriate.

The court also accepted the FTC’s calculation of consumer injury. Although different methods of calculation produced slightly different results, that was due to different time periods and data sources. The FTC presented a reasonable approximation of damages, and defendants offered nothing to suggest its numbers were inaccurate or unreliable. The FTC was entitled to nearly $30 million in equitable relief. The court also granted prejudgment interest at the statutory rate.