Craigslist credit scam by affiliate leads to FTC action

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.

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