Miller: “We alleged Vertrue’s illegal sales practices resulted in a vast number of Iowans’ credit cards being charged for memberships most of the Iowans didn’t even know they had and never used.”
(DES MOINES) Polk County District Court Judge Robert A. Hutchison has ruled that Vertrue Inc. used deceptive and unfair practices to market so-called “buying club” memberships to almost half a million Iowans over the last twenty years, for more than $36 million in revenue. [Go to court ruling.]
“Our jaws dropped, too, when we discovered the numbers,” said Iowa Attorney General Tom Miller, who filed the consumer fraud lawsuit that led to the Court’s decision.
“We learned during the litigation that, as of mid-2009, 497,683 Iowans had been enrolled in 863,970 buying club memberships offered by Vertrue over two decades,” Miller said.
Typical Vertrue buying club “memberships” cost $9.95 to $19.95 per month, with charges usually made to consumers’ credit card or bank accounts. The memberships purport to provide discounts or savings on books, music, clothing, home improvement items, entertainment activities, dining out, and fashion and fitness products.
“We filed the lawsuit because consumers consistently told us they didn’t even know they were members,” Miller said. “We alleged Vertrue’s illegal sales practices resulted in a vast number of Iowans’ credit cards being charged, sometimes repeatedly, for memberships most of the Iowans didn’t even know they had and never used.”
The State lawsuit, which alleged violations of the Iowa Consumer Fraud Act and Iowa’s Buying Club Law, was tried Oct. 26-Nov. 5, 2009, in a bench trial before Judge Hutchison, who issued a 62-page ruling late last week finding that Vertrue and its subsidiary companies, Adaptive Marketing LLC and Idaptive Marketing LLC, were liable for consumer fraud.
Hutchison ruled that over two decades Vertrue had used deceptive and unfair techniques to enroll consumers in memberships and charge their credit cards, often without the consumers’ knowledge. Consumers often made monthly or annual payments for memberships they were not aware of – and sometimes kept paying for years.
“Judge Hutchison’s well-reasoned decision is a great benefit to Iowa consumers,” Miller said. “We have been litigating this case for four years, and it is gratifying that the judge established such an important precedent,” he said.
In this decision, Hutchison determined “liability” – that the Vertrue companies violated Iowa consumer protection laws. Next he will determine the “remedy,” such as restitution or penalties, in a separate proceeding to be scheduled soon.
Hutchison noted that Vertrue’s total Iowa membership revenues over a twenty-year period exceeded $36 million, even after previous refunds to consumers were subtracted.
“We will be seeking restitution for consumers and penalties for Vertrue in the next phase of this case,” Miller said.
Attorney General Tom Miller discussed Hutchison’s ruling at a news conference at his office in Des Moines. He was joined by Mary Grefe, a Des Moines consumer who had unwanted charges placed on her credit card by Vertrue when she responded to an Internet pop-up ad for obtaining a free credit report.
[For more background and detail, see below.]
Mary Grefe of Des Moines, with Attorney General Tom Miller. Grefe said unwanted charges were placed on her credit card.
Assistant Attorney General Steve St. Clair, a leader of Iowa’s lawsuit vs. Vertrue, Inc., and Attorney General Tom Miller.
More background and detail:
How consumers could unknowingly be signed up for buying club memberships:
Miller said Vertrue’s buying club memberships were sold to Iowans through telemarketing, direct mail, and the Internet. “Our lawsuit alleged that many consumers got into unexpected and unnoticed charges when they were offered ‘free-trial-offer’ sales pitches,” he said.
“We alleged that one of Vertrue’s primary methods of selling membership programs begins when a consumer makes a telephone call or visits a web site for a totally unrelated purpose, such as a call to a credit card company’s customer service department, or a call to order a product advertised on a TV infomercial. Before hanging up, the consumer unexpectedly receives a sales pitch for a ‘risk-free membership’ of some kind. If the consumer accepts the membership on a free trial basis – but then fails to affirmatively cancel the membership at the end of the trial period – the consumer’s credit card is charged,” Miller said.
“Many consumers don’t anticipate or look for any charge, in part because they never provided their credit card number to purchase the trial membership,” he said. “But Vertrue companies already have the credit card number from the ‘partner’ business that the consumer called in the first place.”
Hutchison’s ruling noted the Vertrue companies’ own data reflected non-usage of membership “benefits.” Fully 84% of all Iowa memberships had no use whatsoever of the membership benefits. More than 91% of Iowans who had active Vertrue buying club memberships as of May 2009 had never used any membership benefits. [p. 34.] More than 90% of memberships involved no usage for memberships created through direct mail, such as “check mailers,” where recipients received a mailing inviting them to endorse and cash a small check -- with fine-print language that enrolled them for a membership. [See page 48 of Hutchison decision.]
Cashing the check or completing the surveys signed up consumers for buying club memberships. [Go to sample solicitations for copies of sample check-mailer and online “consumer surveys.”]
“The judge heard from many such consumers during the trial, some of whom had unwittingly paid for years without realizing what the charges were for,” Miller said.
Miller strongly advised Iowans to examine their credit card and checking account statements every month for unauthorized or unknown charges by any company – and to dispute unauthorized charges immediately. (Such charges often include a toll-free number to cancel.)
Regarding possible consumer refunds for Vertrue buying club memberships, Miller said the court will determine any restitution arrangements in the next phase of the litigation coming soon. He said Vertrue buying club members do not need to contact the Consumer Protection Division at this time, and that he expected consumers would be notified directly about any restitution arrangements.
More details on the litigation and Judge Hutchison’s ruling dated March 18, 2010:
The Attorney General’s lawsuit, which was filed May 12, 2006, named Vertrue, Inc., of Stamford, CT., which previously was known as “MemberWorks.” The suit later added Vertrue’s subsidiaries as defendants, Adaptive Marketing LLC, and Idaptive Marketing LLC.
Judge Hutchison’s ruling, based on last fall’s two-week bench trial, found that all of the defendants’ membership sales were subject to Iowa’s Buying Club Law. The law requires covered memberships to be sold through written contracts that expressly notify the customer of a 3-day right to cancel and require the customer’s signature; the State alleged none of the membership solicitations complied with the Buying Club Law.
Hutchison’s ruling found that the marketing conducted through telemarketing, direct mail and the Internet all violated Iowa’s Buying Club Law, and that much of the marketing also was deceptive and unfair under the Iowa Consumer Fraud Act.
Hutchison’s ruling focused on several objectionable features of the marketing, including:
- The Court found that “Vertrue fosters invisibility by utilizing a marketing structure that obscures effective notice to the consumer of the membership enrollment . . .” [p. 33.]
- The Court found that Vertrue’s advertised assurances that the trial memberships were “risk free” were often deceptive, particularly when coupled with “breakage” delays and obstacles that discouraged consumers who tried to redeem gift cards, e.g. [p. 43.]
- The Court found that Vertrue misled consumers by sending them “live” checks in small amounts, which if cashed or deposited enrolled the consumer in a membership club and led to credit card charges. The checks were made to appear as if they were refunds or rebates from the consumer’s bank, and membership disclosures in tiny print failed to eliminate the deception. [p. 44]
- The Court found that Vertrue's telemarketing of memberships was designed to obscure, rather than disclose, important information, and that the telemarketing was uniformly deceptive and unfair. Many phone pitches lulled consumers into thinking they were merely receiving a "thank you" for an earlier transaction, rather than enrolling in a program. [pp. 54-58]
- The Court found that a number of Vertrue’s online membership solicitations violated the law by, for example, bundling the sale of two membership programs into a single mouse click, but then creating a multi-step process to cancel the programs. [p. 53.]
- The Court found that Vertrue’s so-called “breakage” practices were an “egregious” effort to place obstacles and delays in the paths of consumers who tried to redeem the gift cards or other premiums that lured them into accepting a trial membership. For example, the Court noted that some consumers pursuing promised gift cards were asked to return “a fake, make-work survey form for the sole purpose of burdening the consumer to the point of abandoning the redemption effort.” [pp. 38-39, 40.]
The bigger picture:
Iowa’s lawsuit is the first in the nation to take Vertrue to trial and to reach a significant judicial finding that the company violated state consumer protection laws.
Miller said future litigation is likely against other companies operating in the realm of buying club marketing.
Miller noted that the United States Senate has been investigating the online membership marketing of Vertrue and similar operations. A “Staff Report” issued by the Commerce Committee in November 2009 was emphatic in denouncing this form of marketing, stating that Vertrue and its competitors “use highly aggressive sales tactics to charge millions of American consumers for services the consumers do not want and do not understand they have purchased.”
Miller noted that Vertrue’s illegal scheme relied heavily on the participation of well-known banks and businesses that consumers knew and trusted. “It is very sad that so many legitimate operations would expose their own customers to consumer fraud by partnering with Vertrue, in exchange for a cut of the membership revenues,” Miller said. “We believe that these marketing partners share responsibility for the victimization that has occurred.”
Beware of “Free Trial Offers”
Attorney General Tom Miller said consumers should be wary of “free trial offers” that may turn into automatic monthly or annual charges for memberships or products or services without them even knowing it.
Consumers may accept a free trial of some kind, assuming they will have to provide a credit card number later if they decide to sign up. But solicitors may already have credit card or checking account numbers from other sources, and billing could begin without the consumer knowing it.
Here are tips to avoid the problem of unwanted charges resulting from free trial offers:
- Be very wary of “free” trial offers. Get the details: Will you be billed automatically if you don’t cancel? By when must you cancel? How do you cancel? Will you receive a mail notice? Remember, they already may have your bank or credit card number to charge you.
- Examine your credit card bill every month, and also your checking account and phone bills. Unwanted membership charges even have appeared on mortgage statements and invoices from mail order retailers. Watch for unauthorized charges -- and dispute them at once. (Statements often include a toll-free number to call in order to cancel.)
- Try to watch your mail carefully. Some mailings notifying you that you will be billed unless you cancel may look like “junk mail.”
- Beware of cashing a check that comes in the mail with a “free trial offer” – the fine print may subject you to future charges.
For more information or to file a complaint, contact the Attorney General's Consumer Protection Division, Des Moines, Iowa 50319. Call 515-281-5926, or 888-777-4590 (toll-free.) The Attorney General’s web site is: www.IowaAttorneyGeneral.gov.